Sandstone,Inc.is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000.The future cash inflows from its project are $40,000,$40,000,$30,000 and $30,000 for years 1,2,3 and 4,respectively.Sandstone uses the net present value method and has a discount rate of 12%.Will Sandstone accept the project?
A)Sandstone accepts the project because the NPV is greater than $30,000.
B)Sandstone rejects the project because the NPV is less than -$4,000.
C)Sandstone rejects the project because the NPV is -$3,021.
D)Sandstone accepts the project because it has a positive NPV of over $28,000.

Question

Quizplus · Accepted Answer

The NPV is calculated as follows:NPV = -Initial Outlay + (Cash Inflow / (1 + Discount Rate)^Year)NPV = -$80,000 + ($40,000 / (1 + 0.12)^1) + ($40,000 / (1 + 0.12)^2) + ($30,000 / (1 + 0.12)^3) + ($30,000 / (1 + 0.12)^4)NPV = -$80,000 + $35,714.29 + $31,887.76 + $26,685.41 + $23,825.37NPV = $28,012.83Since the NPV is positive, Sandstone should accept the project.