Rob P. answered • 10/07/21

Experienced Tutor & Finance Professional

Hey Anna!

This question is testing your knowledge of discounting (opposite of compounding but same idea). We no the future value of the asset upon disposal will be $5,000. The problem also gives us the interest rate, or discount rate, we will use to determine the NPV of the asset at disposal.

Future Value: $5,000

Discount Rate: 5% or 0.05

Year 5: $5,000

Year 4: $5,000 / 1.05 = $4,761.90

Year 3: $4,761.90 / 1.05 = $4,535.15

Year 2: $4,535.15 / 1.05 = $4,319.19

Year 1: $4,319.19 / 1.05 = $4,113.51

NPV: $4,113.51 / 1.05 = __$3,917.63__

You can also solve this using exponents: NPV = $5,000 / (1.05^5) = __$3,917.63__