A project will cost $150,000 to initiate and will generate nominal cash flows of $80,000 in each of the next three years.The real discount rate has been estimated to be 10% per year.Expected inflation is 3% over the next three years.What is the NPV of the project?

Question

Quizplus · Accepted Answer

The correct answer is A because the NPV of the project is $32,675. The NPV is calculated by taking the present value of the cash flows and subtracting the initial investment. The present value of the cash flows is calculated by multiplying each cash flow by the discount factor, which is the present value of $1 received at the end of the year. The discount factor is calculated using the real discount rate and the expected inflation rate.

A Project Will Cost $150,000 to Initiate and Will Generate