Question

The Gamma Company is planning on investing in a new project. This project requires an initial investment into a new machinery of $420,000. The Gamma Company expects cash inflows from this project to be as follows: $200,000 in year 1, $225,000 in year 2, $275,000 in year 3, and $200,000 in year 4 of the project. If the appropriate discount rate for this project is 16% then the NPV of the project is closest to _____________________.

Group of answer choices

$144,385

$197,850

$236,552

$189,737

$206,265

$216,578

Answer 1

NPV = Present value of cash inflows - presnet value of cash outflows

Present value = Future value / (1 + rate)^time

NPV = -420,000 + 200,000 / (1 + 0.16)^1 + 225,000 / (1 + 0.16)^2 + 275,000 / (1 + 0.16)^3 + 200,000 / (1 + 0.16)^4

NPV = -420,000 + 172,413.7931 + 167,211.6528 + 176,180.8602 + 110,458.2196

NPV = $206,265