With a positive NPV, it shows that the investment is profitable.
It is a profitable investment with a positive NPV at a discount rate of 20%.
Data and Calculations
Initial investment = $100
Annual cash inflows = $50
Period of investment = 3 years
Discount rate = 20%
Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return.
Present Value (PV) annuity factor for 3 years at 20% = 2.106
Present value of annual cash inflows = $105.3 ($50 x 2.106)
Net Present Value (NPV) = $5.3 ($105.3 - $100)
Thus, with a positive NPV, it shows that the investment is profitable.
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