Pronto Delivery is contemplating an investment in a delivery truck. The estimate of the project's price is $22,000. The delivery truck will have a life of 5 years and have a salvage value of $2,000. Annual net cash flows from the five years of operations are expected to be $6,000. If Pronto's applicable discount rate is 10%, what is the net present value of this project? Is the project acceptable?
A) NPV = -$1,986.60 and is unacceptable
B) NPV = -$1,986.60 and is acceptable
C) NPV = $1,986.60 and is unacceptable
D) NPV = $1,986.60 and is acceptable
E) None of the above

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated using the formula: NPV = (Net Cash Flows / (1 + r)^t) - Initial Investment, where r is the discount rate and t is the time period. For this project, the NPV can be calculated as follows: NPV = ($6,000 / 1.1) + ($6,000 / 1.1^2) + ($6,000 / 1.1^3) + ($6,000 / 1.1^4) + (($6,000 + $2,000) / 1.1^5) - $22,000. This calculation results in a positive NPV, indicating the project is acceptable. The correct answer is D, as it states the NPV is positive and the project is acceptable.

Pronto Delivery Is Contemplating an Investment in a Delivery Truck