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An investment of $120,000 on 1 April 20X6 is forecast to yield a net cash flow of $14,000 each year for four years commencing on 31 March 20X7, followed by $20,000 each year in perpetuity. The appropriate cost of capital is 8% per year.
What is the positive net present value of the investment (to the nearest $1,000)?
Answer is 93,000.Can you please explain this? As I understand it:
(120,000)
1-4 14,000*3.312 46,368
Perp. (20,000/0.08)*0.735 110,000My Answer – 110,118. <<110,000 to nearest ‘000
Thank you!
Either you have mistyped the question or there is an error in your book.
Your workings are correct (although you have mistyped one of the figures).
(20,000/0.08) x 0.735 = 183,750 (not 110,000).
46,368 + 183,750 – 120,000 = 110,118.
Hi
I believe its 14000x df which is 3.993-1st year df 0.926= df of 3.067
14000* 3.067= £42938
20000/0.08x df 0.681= 17025042938+170250-120000= 93188 approx 93000
20,000 perpetuity starts in year 5 I believe.
year 2-5 less yr 1 annuity
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