A project will produce cash inflows of $1,750 a year for four years. The project initially costs $10,600 to get started. In year five,the project will be closed and as a result should produce a cash inflow of $8,500. What is the net present value of this project if the required rate of return is 13.75%?
A) -$5,474.76
B) -$1,011.40
C) -$935.56
D) $1,011.40
E) $5,474.76

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to find the present value of all the cash inflows and outflows of the project using a discount rate of 13.75%.

Year 0: -$10,600 (initial cost)
Year 1: $1,750 ÷ (1+0.1375) = $1,537.39
Year 2: $1,750 ÷ (1+0.1375)² = $1,350.70
Year 3: $1,750 ÷ (1+0.1375)³ = $1,178.19
Year 4: $1,750 ÷ (1+0.1375)⁴ = $1,018.06
Year 5: $8,500 ÷ (1+0.1375)⁵ = $4,145.09

NPV = Present value of cash inflows - Present value of cash outflows
NPV = $1,537.39 + $1,350.70 + $1,178.19 + $1,018.06 + $4,145.09 - $10,600
NPV = -$935.56

Therefore, the net present value of this project is -$935.56, which means the project is not worth pursuing as it will result in a loss. Option B is the correct answer.

A Project Will Produce Cash Inflows of $1,750 a Year