Sloan Inc. recently invested in a project with a 3-year life span. The net present value was $9,000 and annual cash inflows were $21,000 for year 1; $24,000 for year 2; and $27,000 for year 3. The initial investment for the project, assuming a 15% required rate of return, was $\begin{array}{llr}& \text { Present Value } & \text { PV of an Annuity } \
\text { Year } & \text { of } 1 \text { at } 15 \% & \text { of } 1 \text { at } 15 \%\
1 & .870 & .870 \
2 & .756 & 1.626 \
3 & .658 & 2.283
\end{array}$

Question

Quizplus · Accepted Answer

To find the initial investment, we calculate the present value (PV) of the annual cash inflows and subtract the net present value (NPV) from the total PV of cash inflows. Using the given present value of an annuity factors for a 15% rate of return:- Year 1 cash inflow PV = $21,000 * 0.870 = $18,270- Year 2 cash inflow PV = $24,000 * 0.756 = $18,144- Year 3 cash inflow PV = $27,000 * 0.658 = $17,766Total PV of cash inflows = $18,270 + $18,144 + $17,766 = $54,180Initial investment = Total PV of cash inflows - NPV = $54,180 - $9,000 = $45,180

Sloan Inc Recently Invested in a Project with a 3-Year Life