A project has an initial cost of $384,200 and cash inflows of $187,636, $93,496, $103,802, and $92,556, for Years 1 to 4, respectively. What is the NPV of this project if the discount rate is infinite?
A) $384,200
B) −$93,290
C) $93,290
D) $128,415
E) −$384,200

Question

Quizplus · Accepted Answer

When the discount rate is infinite, the NPV formula becomes:
NPV = Initial Cost + Cash Inflows / (1 + infinity)^n

Since any number divided by infinity approaches zero, the NPV would be:
NPV = $384,200 + ($187,636 + $93,496 + $103,802 + $92,556) / 0

NPV = $384,200 - infinity

Since infinity is not a finite number, the NPV is undefined. However, it is clear that the project is not profitable and has a negative net present value. Therefore, the best choice is E, which represents a negative NPV of $384,200.

A Project Has an Initial Cost of $384,200 and Cash