A project will cost $50,000 initially, and is expected to return $25,000 in years 1 and 2, -$20,000 in year 3, and $25,000 in years 4 and 5. Calculate the project's NPV if the appropriate cost of
Capital is 20%. Round your answer to the nearest dollar.
A)+$28,010
B)-$1,276
C)-$2,247
D)+$21,872

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount each cash flow using the cost of capital of 20%.

Year 0: -$50,000 (initial investment)
Year 1: $25,000 / (1+0.2)^1 = $20,833.33
Year 2: $25,000 / (1+0.2)^2 = $17,361.11
Year 3: -$20,000 / (1+0.2)^3 = -$11,574.07
Year 4: $25,000 / (1+0.2)^4 = $12,152.78
Year 5: $25,000 / (1+0.2)^5 = $10,127.32

NPV=sum of all discounted cash flows = -$50,000 + $20,833.33 + $17,361.11 - $11,574.07 + $12,152.78 + $10,127.32 = -$1,276.44

Since the NPV is negative, the project should not be undertaken. Therefore, the best choice is B.

A Project Will Cost $50,000 Initially, and Is Expected to Return