What is the net present value of a project that has a net investment of $148,000 and net cash flows of $25,000 in the first year, $45,000 in years 2-7, and a negative net cash flow of $27,000 in year 8? Assume the cost of capital is 11%.
A) $34,302
B) $74,847
C) $57,738
D) -$2,238

Question

Quizplus · Accepted Answer

The correct answer is A because the net present value of the project is $34,302. The net present value is calculated by taking the sum of the present values of the net cash flows, which is $25,000 + $45,000 * (1 - 1 / (1 + 0.11)^2) / 0.11 + $45,000 * (1 - 1 / (1 + 0.11)^3) / 0.11 + $45,000 * (1 - 1 / (1 + 0.11)^4) / 0.11 + $45,000 * (1 - 1 / (1 + 0.11)^5) / 0.11 + $45,000 * (1 - 1 / (1 + 0.11)^6) / 0.11 + $45,000 * (1 - 1 / (1 + 0.11)^7) / 0.11 - $27,000 * (1 - 1 / (1 + 0.11)^8) / 0.11 = $34,302.

What Is the Net Present Value of a Project That