Question 1) Find the net present value (NPV) for the following series of future cash flows, assuming the company's cost of capital is 11.13 percent. The initial outlay is $318,577.

Year 1: 121,833

Year 2: 129,850

Year 3: 153,945

Year 4: 181,083

Year 5: 153,886

Round the answer to two decimal places.

Answer:

Net present value $217,884.25

Solution:

Year 1: (1+.1113)^-1 x 121,833 = 109,631.0627

Year 2: (1+.1113)^-2 x 129,850 = 105,142.7484

Year 3: (1+.1113)^-3 x 153,945 = 112,168.6892

Year 4: (1+.1113)^-4 x 181,083 = 118,727.8008

Year 5: (1+.1113)^-5 x 153,886 = 90,790.94559

Total Present value cash in flow 536,461.2467

Total Present value cash in flow 536,461.2467

Less:

Initial outlay (318,577)

Net present value 217,884.25

The investment can generate a net present value of $217,884.25 within 5 years.

This is acceptable investment because the net present value is positive or the cash inflow is higher than the initial outlay.