A capacity alternative has an initial cost of $30,000 and cash flow of $20,000 for each of the next four years. If the cost of capital (i.e., interest rate) is 5 percent, the net present value of this investment is:
A) greater than $80,000 but less than $110,000.
B) greater than $110,000.
C) less than $50,000.
D) greater than $50,000.
E) impossible to calculate, because variable costs are not known.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the cash flows at the cost of capital and subtracting the initial investment. The NPV is less than $50,000 when calculated with a 5% discount rate.

A Capacity Alternative Has an Initial Cost of $30,000 and Cash