Question

What should you pay for an investment that will give you the following end-of-year cash flows? Your required rate of return is 18%.

Year 1: $285,000
Year 2: $831,000
Year 3: $716,000
Year 4: $498,000

Answer 1

What should you pay for an investment that will give you the following end-of-year cash flows? Your required rate of return is 18%.

Year 1: $285,000

Year 2: $831,000

Year 3: $716,000

Year 4: $498,000

Answer

$$NPV = \frac{285}{1 - 0.18} + \frac{831}{(1 - 0.18)^2} + \frac{716}{(1 - 0.18)^3} + \frac{498}{(1 - 0.18)^4} = 3989,443.$$

So, to gain profit the person should pay an investment that would be less than 3989,443 $.