b) Suppose you want to buy a custom-made program to manage your IS project from Supertuna co., and they ask that you make four payments of $2000 for four years, beginning next year, for a total of $8000. If they would agree to a single lump-sum payment at the time of sale, what amount do you think they would agree to? Let's suppose that the current bank interest is 7% return on investment. i) Calculate the present value (PV) of each $2000 payment in years 1, 2, 3, and 4. ii) Calculate the net present value (NPV) of the four $2000 payments.

b) Suppose you want to buy a custom-made program to manage your IS project from Supertuna co., and they ask that you make four payments of $2000 for four years, beginning next year, for a total of $8000. If they would agree to a single lump-sum payment at the time of sale, what amount do you think they would agree to? Let's suppose that the current bank interest is 7% return on investment. i) Calculate the present value (PV) of each $2000 payment in years 1, 2, 3, and 4. ii) Calculate the net present value (NPV) of the four $2000 payments.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

present value (PV) and net present value (NPV)

b) Suppose you want to buy a custom-made program to manage your IS project from
Supertuna co., and they ask that you make four payments of $2000 for four years,
beginning next year, for a total of $8000. If they would agree to a single lump-sum payment
at the time of sale, what amount do you think they would agree to? Let's suppose that the
current bank interest is 7% return on investment.
i)
Calculate the present value (PV) of each $2000 payment in years 1, 2, 3, and 4.
i)
Calculate the net present value (NPV) of the four $2000 payments.

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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