If an investment requires payment of $10,000 now and promises to return a payout of $15,000 one year from now and another payout of $15,000 two years from now, the net present value of the investment at an interest rate of 8% is approximately
A)$5,000.
B)$11,749.
C)$16,749.
D)$26,749.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting future cash flows to the present value and subtracting the initial investment. The formula is: NPV = (Future Cash Flow / (1 + r)^n) - Initial Investment. For this investment: NPV = ($15,000 / (1 + 0.08)^1) + ($15,000 / (1 + 0.08)^2) - $10,000 = $13,888.89 + $12,860.08 - $10,000 = $16,748.97, which rounds to $16,749.

If an Investment Requires Payment of $10,000 Now and Promises