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12 November, 19:44

An investment of $115 generates after-tax cash flows of $50 in Year 1, $90 in Year 2, and $150 in Year 3. The required rate of return is 20 percent. The net present value is closest to $92.32. $75.97. $37.27. $92.35.

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  1. 12 November, 23:15
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    The correct answer is B.

    Explanation:

    Giving the following information:

    An investment of $115 generates after-tax cash flows of $50 in Year 1, $90 in Year 2, and $150 in Year 3.

    Rate of return = 20%

    To calculate the present value, we need the following formula:

    NPV = - Io + ∑[Cf / (1+i) ^n]

    Cf = cash flow

    Io = 115

    Cf1 = 50 / 1.20 = $41.67

    Cf2 = 90/1.2^2 = $62.5

    Cf3 = 150/1.2^3 = $86.81

    NPV = - 115 + (41.67 + 62.5 + 86.81)

    NPV = $75.98
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