investment guarantees listed cash flows. Find present value,

golazin

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May 25, 2008
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An initial investment of $25,000 in a business guarantees the following Cash flows:

Code:
     Years    Cash Flows
       3        $8,000
       4       $10,000
       6       $14,000
Assume an interest rate of 5% compounded semiannually,
a) Find the net present value of the cash flows.
b) Is the investment profitable?
 
golazin said:
An initial investment of $25,000 in a business guarantees the following Cash flows:

Code:
     Years    Cash Flows
       3        $8,000
       4       $10,000
       6       $14,000
Assume an interest rate of 5% compounded semiannually,
a) Find the net present value of the cash flows.
b) Is the investment profitable?

Please share with us your work/thoughts - so that we would know where to begin to help you.
 
Look at it this way, gozalin:
Code:
?           (8000)            (10000)                     (14000)
0..............3................4............................6
 
Here I subtract the intial investment from the sum of the present values of the cash flows:

NPA= 8,000(1.05)^-3+ 10,000(1.05)^-4+ 14,000(1.05)^-6 -25,000
I stuck here :(

Shall i subtract the asnwer by 25,000???
 
No, you were stuck well before that. You seem to have no idea what "compounding" means.

You simply MUST go back, reread a few sections (maybe all of them), have that heart-to-heart chat with your academic advisor, and gain some fundamental understanding that you are missing.
 
golazin said:
But this is what my instructor told me to do
Which is what your instructor told you to do? Review the material you don't understand? Have a conference with your academic advisor? Get some extra tutoring help (the face-to-face kind) through your department?

Or just mindlessly attempt to apply a formula that is clearly not being understood? :shock:

I certainly hope it's not the latter.... :?

Eliz.
 
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