00:01
In the question it is given that an investment cost $50 ,000.
00:06
So we can say that the cost of investment is going to be $50 ,000.
00:16
Now the benefit of investing this $50 ,000 is that it will give a return of 15 ,000 operating cash flows per year for five years.
00:27
So there will be a return of $15 ,000.
00:34
For five years.
00:38
And along with that, it is said that the required rate of return is 14 % and we need to find out the net present value of this investment.
00:58
So for that, to determine the net present value, what we will be doing, we will be using present value of annuity and this will be type of ordinary annuity, formula, to calculate the present value of the cash flows.
01:35
Why we have used present value of annuity formula? because we are going to have an equal amount of cash flow for the five years.
01:45
So we can use the present value of annuity formula to calculate the present value of cash flow.
01:51
Now our present value of cash flow is going to be per year cash flow times 1 minus.
02:13
1 plus r to the power minus n upon n and here this r refers to required rate of return and n refers to total time period now in the question we have been given that the required rate of return is 14 % and total time period will be we are going to have the cashed up for five years so the value of n is going to be 5 now putting the values per year cash flow is of $15 ,000 so 15 ,000 times 1 minus 1 plus r that is 0 .14 14 % to the power minus 5 upon 0 .14.
03:09
Now solving this we are going to get 15 ,000 times this factor is going to be 3 .433.
03:25
That finally gives us 51496 .20 dollars.
03:35
So this is the present value of the cash flow...