Naomi Corporation has a capital budgeting project that has a negative net present value of $36,000. The life of this project is 6 years. Naomi's discount rate is 20%. By how much would the annual cash inflows from this project have to increase in order to have a positive net present value?
A)$1,200 or more
B)$2,412 or more
C)$6,000 or more
D)$10,824 or more

Question

Quizplus · Accepted Answer

To find out the required increase in annual cash inflows, we can use the following formula:

Increase in annual cash inflows = -(Negative NPV) / PVIFA

Where PVIFA stands for Present Value Interest Factor of Annuity, and it can be calculated using the formula:

PVIFA = (1 - (1 + r)^-n) / r

Where r is the discount rate and n is the number of periods, which is 6 in our case.

Substituting the given values:

PVIFA = (1 - (1 + 0.2)^-6) / 0.2

PVIFA = 3.791

Now, we can calculate the required increase in annual cash inflows:

Increase in annual cash inflows = -(36,000) / 3.791

Increase in annual cash inflows = 9,499

Therefore, the annual cash inflows would have to increase by $10,824 or more to have a positive net present value. The closest option is D, which is the correct answer.

Naomi Corporation Has a Capital Budgeting Project That Has a Negative