Suppose you have an opportunity to invest in a project, which requires a cash outlay of $15,000 today.The project is expected to generate $6,000 in year 1, $6,500 in year 2, and $7,000 in year 3.The appropriate risk-adjusted discount rate for the project is 12%.What is the project's NPV? Ignore income taxes for this question.

Question

Quizplus · Accepted Answer

The Net Present Value (NPV) is calculated by discounting the future cash flows back to their present value and then subtracting the initial investment. Using the formula for NPV:$$ NPV = \frac{CF_1}{(1+r)^1} + \frac{CF_2}{(1+r)^2} + \frac{CF_3}{(1+r)^3} - Initial\ Investment $$Where $ CF_1, CF_2, CF_3 $ are the cash flows in years 1, 2, and 3 respectively, and $ r $ is the discount rate.$$ NPV = \frac{6000}{(1+0.12)^1} + \frac{6500}{(1+0.12)^2} + \frac{7000}{(1+0.12)^3} - 15000 $$$$ NPV = \frac{6000}{1.12} + \frac{6500}{1.2544} + \frac{7000}{1.404928} - 15000 $$$$ NPV = 5357.14 + 5182.14 + 4980.72 - 15000 $$$$ NPV = 521.36 $$Therefore, the project's NPV is $521.36, making choice B correct.

Suppose You Have an Opportunity to Invest in a Project