What is the NPV of a project that required a net investment of $500,000 and produced net cash flows of $150,000 per year for 5 years and $110,000 for the next 5 years? Assume the cost of capital is 14%.
A) $211,080
B) $392,580
C) $588,710
D) $160,920

Question

Quizplus · Accepted Answer

The Net Present Value (NPV) is calculated by discounting the future cash flows back to their present value and then subtracting the initial investment. For the first 5 years, the cash flow is $150,000 per year, and for the next 5 years, it is $110,000 per year. Using a discount rate of 14%, the NPV can be calculated as follows:$$ NPV = \frac{150,000}{(1+0.14)^1} + \frac{150,000}{(1+0.14)^2} + \frac{150,000}{(1+0.14)^3} + \frac{150,000}{(1+0.14)^4} + \frac{150,000}{(1+0.14)^5} + \frac{110,000}{(1+0.14)^6} + \frac{110,000}{(1+0.14)^7} + \frac{110,000}{(1+0.14)^8} + \frac{110,000}{(1+0.14)^9} + \frac{110,000}{(1+0.14)^10} - 500,000 $$Calculating each term and summing them up gives an NPV of approximately $211,080, thus the correct answer is A.

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