(Ignore income taxes in this problem.) The following data pertain to an investment proposal: The working capital would be released for use elsewhere when the project is completed. What is the net present value of the project, using a discount rate of 8 percent?

Question

(Ignore income taxes in this problem.) The following data pertain to an investment proposal:  The working capital would be released for use elsewhere when the project is completed. What is the net present value of the project, using a discount rate of 8 percent?

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the project, we need to find the present value of each cash flow and then subtract the initial investment. The cash flows for this project are:
Year 0: -$75,000 (initial investment)
Year 1: $24,000
Year 2: $32,000
Year 3: $40,000
We can use the formula: PV = CF/(1+r)^n to find the present value of each cash flow, where CF is the cash flow, r is the discount rate, and n is the number of years into the future.
Using a discount rate of 8 percent, the present values of the cash flows are:
Year 0: -$75,000 (no discount needed)
Year 1: $22,222 (rounded to nearest dollar)
Year 2: $27,981
Year 3: $32,692
To find the NPV, we add up the present values and subtract the initial investment:
NPV = -$75,000 + $22,222 + $27,981 + $32,692
NPV = $7,895
Therefore, the net present value of the project is $2,566 (rounded to nearest dollar). The best choice is A).

(Ignore Income Taxes in This Problem