Category: Business and Money > Accounting
Asked by: fatima1102-ga
List Price: $2.00
10 Sep 2005 23:30 PDT
Expires: 10 Oct 2005 23:30 PDT
Question ID: 566665
An investment offers cash flows of $300, -$200, -$125 each year starting at time zero. What is the net present value of this investment if the market rate of interest is 15%?
Re: cash flows
Answered By: elmarto-ga on 11 Sep 2005 07:47 PDT
Hi again fatima! In order to answer this, you would need to use the same formula I provided in the previous question I answered for you (Question ID 566664), found in the link: Calculating the Present and Future Value of Annuities http://www.investopedia.com/articles/03/101503.asp In this case, the present value of this investment can be calculated as: PV = 300 + (-200)/1.15 + (-125)/1.15^2 Notice that the first payment is not discounted, because according to your question, it's done today. The -$200 payment is made one year from now; and the $-125 one is made two years from now. The formula above gives that the present value of this investment is $31.56. I hope this helps! Best wishes, elmarto
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