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 its first cash flow of $8,000 two years from now, which will remain the same for a total of 10 years.What is the project's NPV if the appropriate discount rate is 14%?

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount all the future cash flows to present value and subtract the initial investment.

Formula for NPV: NPV = CF1 / (1+r)^1 + CF2 / (1+r)^2 +...+ CFn / (1+r)^n - Initial Investment

where CF1, CF2...CFn are the expected cash flows, r is the discount rate and n is the number of years.

In this case: 
n = 10 years 
r = 14% 
Initial Investment = -$25,000 (negative because it's a cash outlay) 
CF1 = $8,000 (at the end of year 2) 
CF2 to CF10 = $8,000 (same cash flow for 10 years)

Plugging these numbers into the formula: 
NPV = $8,000 / (1+14%)^2 + $8,000 / (1+14%)^3 + ... + $8,000 / (1+14%)^10 - $25,000

NPV = $11,604.39

Therefore, the best choice is C.

Suppose You Have an Opportunity to Invest in a Project