BTHE CALCULATION FOR NET PRESENT VALUE IS BASED ON THE COMPOUND INTERE...

33. Answer: b

The calculation for net present value is based on the compound interest for-

mula.

FV PV ( 1 r )

ⁿ

Where FV is future value and PV is present value.

Solving this for the present value gives:

PV FV / (1 r )

ⁿ

NPV 50,000 (100,000 / 1.1 ) 40,909

Note that all the negative cash flows occur at the beginning of the year when

the machine is purchased and that the positive cash flows all occur at the end

of one year.