Ricky is thinking about borrowing $10,000 from Fred. He promises Fred cash flows of $5000 for the next three years. If Fred’s cost of capital is 10%, what is the Net Present Value of the investment for Fred?

$2,434.50

Explanation:

The computation of the net present value is shown below:

Net present value = Present value for next three years - initial investment

where,

Present value for next three years is

= Annual payment × PVIFA factor for 10% for 3 years

= $5,000 × 2.4869

= $12,434.50

Refer to the PVIFA table

And, the initial investment is $10,000

So, the net present value is

= $12,434.50 - $10,000

= $2,434.50

answer; swot analysis;

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