An investment of $100,000 promises net operating cash inflows of $40,000 per year for each of the next three years. If the required rate of return is 14%, what is the net present value of the project?

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount each year's cash inflows back to the present at a rate of 14% per year. Using the formula for NPV:

NPV = CF1 / (1+r)^1 + CF2 / (1+r)^2 + CF3 / (1+r)^3 - Initial investment

where CF = cash flow and r = required rate of return.

In this case, the calculation is:

NPV = 40,000 / (1.14)^1 + 40,000 / (1.14)^2 + 40,000 / (1.14)^3 - 100,000
NPV = 34,950 + 28,165 + 22,740 - 100,000
NPV = -$7,135

Since the NPV is negative, the investment should not be made. Choice C is the correct answer.

An Investment of $100,000 Promises Net Operating Cash Inflows of $40,000