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A cattleman is considering buying a herd of young cows for $40,000. The cattleman estimates he...

A cattleman is considering buying a herd of young cows for $40,000. The cattleman estimates he would keep the cows for six more years and then sell them for a salvage value of $20,000. Annual cash revenues will be $18,000 for each of the six years. Cash expenses will be $10,000 per year. Therefore, net annual cash flows are $8,000 annually for six years. At a discount rate of 12%, what is the net present value of this investment?

-$40,000

$43,024

$3,024

$10,133
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Answer #1

Net present value = Present value of cash inflows - present value of cash outflows

Net present value = Annuity * [1 - 1 / (1 + r)n] / r + FV / (1 + r)n - initial investment

Net present value = 8,000 * [1 - 1 / (1 + 0.12)6] / 0.12 + 20,000 / (1 + 0.12)6 - 40,000

Net present value = 8,000 * [1 - 0.506631] / 0.12 + 10,132.62242 - 40,000

Net present value = 8,000 * 4.111408 + 10,132.62242 - 40,000

Net present value = $3,204

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