Question

An independent project has a net investment of $260,000, and generates net cash flows of $88,000 for 5 years. The required rate of return in 20%. Compute the net present value.

Group of answer choices

12056.76

3173.87

4537.89

10450.56

Answer 1

Ans: b) 3173.87

Explanatory Solution:

Given:

Net Investment of Project or Initial Investment= $ 260,000

Net Cash Flows of Project for 5 Years = $ 88,000 per year

Required Rate of Return or Discount Rate= 20 %

To Calculate:

The Net Present Value (NPV) of Project

Formula:

Net Present Value = Total Present Value of Cash Flows – Initial Investment

Present Value of Cash Flows = Cash Flow of the Year / (1 + Discount Rate / 100) ^Number of Respective Year

Process: Calculation of NPV of Project:

Tabulation of Calculation of Net Present Value of Project:

Year	Cash Flows	Present Value of Cash Flows = Cash Flow of the Year / (1 + Discount Rate / 100) ^ Number of Respective Year
1	$ 88,000	($ 88,000) / (1+0.20) ^1 = $ 73,333.333333
2	$ 88,000	($ 88,000) / (1+0.20) ^2 = $ 61,111.111111
3	$ 88,000	($ 88,000) / (1+0.20) ^3 = $ 50,925.925926
4	$ 88,000	($ 88,000) / (1+0.20) ^4 = $ 42,438.271605
5	$ 88,000	($ 88,000) / (1+0.20) ^5 = $ 35,365.226337
Total		Total of Present Value of Cash Flows = $ 263,173.868312
NPV		Net Present Value = Total of Present Value of Cash Flows – Initial Investment NPV = $ 263,173.868312 - $ 260,000 = $ 3173.868312 ≈ $ 3173.87 Net Present Value of Project = $ 3173.87

The Net Present Value of Project = $ 3173.87

So, our answer option is b) 3173.87

Ans = b) 3173.87