A four-year project has an initial outlay of $100,000. The future cash inﬂows from its project are $50,000 for years one and two and $40,000 for years three and four. Given a discount rate of 10%,
Will the project be accepted?
A) Accept the project as the NPV is $44,150.
B) Reject the project as the NPV is $44,150.
C) Reject the project as the NPV is $(44,150).
D) Accept the project as the NPV is $18,250.
E) Reject the project as the NPV is $18,250.

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount each future cash flow by the discount rate of 10%:
NPV = -$100,000 + $50,000/(1.1)^1 + $50,000/(1.1)^2 + $40,000/(1.1)^3 + $40,000/(1.1)^4
NPV = -$100,000 + $41,322 + $37,566 + $28,231 + $25,030
NPV = $31,149
Since the NPV is positive ($31,149), the project should be accepted. Choice A is the correct answer.

A Four-Year Project Has an Initial Outlay of $100,000