You have heard about a new light bulb that is costly to purchase but uses little electricity and thus allows you to save money on your utility bill. Suppose the new light bulb costs $10 today but next year your electricity bill will be $50 lower. If the interest rate is 10%, what is the net present value of buying this new light bulb and using it for one year?
A)$40
B)-$45.45
C)$55
D)$35.45

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by subtracting the initial cost from the present value of the savings. The present value of the $50 savings next year is $50 / (1 + 0.10) = $45.45. The NPV is $45.45 - $10 = $35.45.

You Have Heard About a New Light Bulb That Is