Suppose you have an opportunity to invest in a project, which requires an after-tax incremental cash outlay of $25,000 today.The project is expected to generate after-tax cash flows of $7,500 per year for the next six years.What is the project's NPV if the appropriate discount rate is 15%?

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to find the present value of all the cash flows and subtract the initial investment. Using a discount rate of 15% and the cash flows provided, we can create the following table:

| Year | Cash Flow | Present Value Factor | Discounted Cash Flow |
|------|-----------|---------------------|----------------------|
| 0    | -$25,000  |        1.0000       |         -$25,000     |
| 1    | $7,500    |        0.8696       |          $6,572        |
| 2    | $7,500    |        0.7561       |          $5,670        |
| 3    | $7,500    |        0.6575       |          $4,931        |
| 4    | $7,500    |        0.5718       |          $4,289        |
| 5    | $7,500    |        0.4972       |          $3,728        |
| 6    | $7,500    |        0.4329       |          $3,246        |

Summing all of the discounted cash flows, we get $3,386. This means that the NPV of the project is $3,386 - $25,000 = -$21,614. Since the NPV is negative, we would not invest in this project as it would result in a net loss.

Suppose You Have an Opportunity to Invest in a Project