Answer:
Year Cash Flow
1 $550
2 $5,634
3 $850
4 $1,450
Net Present value = $6,930
Explanation:
Net present value is the sum of present value of all future cash inflows and outflows of a project using discounting method by a required rate of return. It measure the net value of the project's cash flows in present value term.
Net present Value = [ FV1 / (1 + r)^1 ] + [ FV2 / (1 + r)^2 ] + [ FV3 / (1 + r)^3 ] + [ FV4 / (1 + r)^4 ]
FV = Future value
r = Required rate of return = 9%
$6,930 = [ $550 / (1 + 0.09)^1 ] + [ FV2 / (1 + 0.09)^2 ] + [ $850 / (1 + 0.09 )^3 ] + [ $1,450 / ( 1 + 0.09 )^4 ]
$6,930 = $504.59 + [ FV2 / (1 + 0.09)^2 ] + 656.36 + 1,027.22
$6,930 = $2,188.16 + [ FV2 / (1 + 0.09)^2 ]
$6,930 - $2,188.16 = [ FV2 / 1.1881 ]
$4,741.84 = [ FV2 / 1.1881 ]
FV = $4,741.84 x 1.1881 = $5,634
