You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on a proposed project.
Up-front cost: $300,000
Next year's revenue: $15,000
Real interest rate: 8%
Depreciation rate: 10%
What is the present value of the stream of payments from this project?
A)$383,333
B)$83,333
C)$315,000
D)$18,000

Question

Quizplus · Accepted Answer

The present value (PV) of the stream of payments from this project can be calculated using the formula for the present value of a single future payment: PV = FV / (1 + r), where FV is the future value ($15,000 in this case) and r is the real interest rate (0.08 or 8%). Therefore, PV = $15,000 / (1 + 0.08) = $15,000 / 1.08 = $13,888.89. However, to find the net present value (NPV), we must subtract the up-front cost from this value: NPV = $13,888.89 - $300,000 = -$286,111.11. None of the options match this calculation directly, indicating a misunderstanding in the approach or the options provided. The correct approach involves considering the revenue as an annual return and accounting for depreciation, but with the given options and calculations, there seems to be a discrepancy. The closest match by logic, considering a straightforward calculation without depreciation, would still not directly lead to any of the provided options. Thus, the explanation provided doesn't match the options, suggesting a need for reevaluation of the calculation method or the understanding of the question's requirements.

You've Graduated from College and Are Now Working in an Investment