Problem 1:
You have an opportunity to invest in a business venture. It requires a $250,000 investment on January 1st. You will receive $70,000 in After-Tax Cash Flows per year on December 31st for 3 years.
At the end of 3 years, the project will be terminated, and all assets liquidated.
The net terminal value is $80,000.
Although the sum of all these cash receipts is $290,000, you realize that the Time Value of Money concept means that those future cash receipts are worth less in "today" dollars.
Therefore, for all investment opportunities, you use 10% to analyze the current (i.e., present) value of all future cash flows.
The Present Value factors at 10% are Yr 1 = 0.909, Yr 2 = 0.826, and Yr 3 = 0.751
Using those factors, what is the Net Present Value of this investment opportunity?
Problem 2:
You have an opportunity to invest in a business venture. For just $50,000 invested on January 1st, you will receive $20,000 in After-Tax Cash Flows per year on December 31st for 3 years.
As you know, if all you cared about was a Nominal Payback Period of "less than 3 years" for your investments, then this would be a good investment since $50,000 / $20,000 = 2.50 years.
However, your financial advisor has told you to consider the "Time Value of Money" whenever looking at a potential investment.
Your advisor suggests that you use Present Value factors at 10%.
Yr 1 = 0.909, Yr 2 = 0.826, and Yr 3 = 0.751
Using these factors, what is the Net Present Value of this investment opportunity?