Seattle Corporation identifies an investment opportunity that will yield end of year cash flows of $30,000 in both Year 1 and Year 2, $35,000 in both Year 3 and Year 4, and $40,000 in Year 5. The investment will cost the firm $100,000 today, and the firm's required rate of return is 10 percent. What is the net present value (NPV) for this investment?

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount each cash flow back to its present value and then sum the present values. Using a financial calculator or spreadsheet, we can calculate the NPV as follows:

NPV = -$100,000 + ($30,000/1.1) + ($30,000/1.1)^2 + ($35,000/1.1)^3 + ($35,000/1.1)^4 + ($40,000/1.1)^5
NPV ≈ $27,104.46

Since the NPV is positive, accepting the investment would increase the wealth of the shareholders, and thus it is a good investment choice. Therefore, the best choice is B.

Seattle Corporation Identifies an Investment Opportunity That Will Yield End