Question

A company is considering an investment that will cost $744,000 and have a useful life of 8 years. The cash flows from the project are expected to be $512,000 per year in the first two years then $108,000 per year for the last 6 years. If the appropriate discount rate is 15.0 percent per annum, what is the NPV of this investment (to the nearest dollar)?

Select one:

a. $397417

b. $1885417

c. $415178

d. $497087

Answer 1

The correct answer is Option (A) - $397,417
Net Present Value = Present Value of Cash Inflow - Present Value of Cash Outlflow
Calculation of Net Present Value
Present Value of Cash Outlflow = 744,000
Present Value of Cash Inflow
Year	Cash Inflow	PV Factors @ 15%	Present Value	PV Factors @ 15% Formula
1	512,000	0.8695652	445,217	1/(1+0.15)^1
2	512,000	0.7561437	387,146	1/(1+0.15)^2
3	108,000	0.6575162	71,012	1/(1+0.15)^3
4	108,000	0.5717532	61,749	1/(1+0.15)^4
5	108,000	0.4971767	53,695	1/(1+0.15)^5
6	108,000	0.4323276	46,691	1/(1+0.15)^6
7	108,000	0.3759370	40,601	1/(1+0.15)^7
8	108,000	0.3269018	35,305	1/(1+0.15)^8
			1,141,417
Net Present Value = 1,141,471 - 744,000
Net Present Value = 397,417