Question

In: Accounting

A company is considering an investment that will cost $744,000 and have a useful life of...

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

Solutions

Expert Solution

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

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