Facio Corporation has provided the following data concerning an investment project that it is considering: Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The working capital would be released for use elsewhere at the end of the project in 3 years. The company's discount rate is 8%. The net present value of the project is closest to:

Question

Facio Corporation has provided the following data concerning an investment project that it is considering:  Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The working capital would be released for use elsewhere at the end of the project in 3 years. The company's discount rate is 8%. The net present value of the project is closest to:

Quizplus · Accepted Answer

Using the tables provided, the appropriate discount factor for year 1 is 0.926, for year 2 is 0.857, for year 3 is 0.794 and for year 4 is 0.735.

Then, we can calculate the present value of the cash inflows: 
Year 1: $22,500 x 0.926 = $20,835
Year 2: $22,500 x 0.857 = $19,327.50
Year 3: $22,500 x 0.794 = $17,865
Year 4: $45,000 x 0.735 = $33,075

The total of the present value of cash inflows is $91,102.50.

Next, we need to calculate the present value of the initial investment: 
$120,000 x 0.794 (for year 0) = $95,280

Finally, we calculate the net present value (NPV): 
NPV = Present value of cash inflows - Present value of initial investment 
NPV = $91,102.50 - $95,280 = -$4,177.50

Since the NPV is negative, the project should be rejected. The closest answer choice is B) $(61,412), but we can see that the NPV is actually closer to A) $(113,022). However, both of these choices are much higher than the calculated NPV, so the correct answer is B) $(61,412).

Facio Corporation Has Provided the Following Data Concerning an Investment