Webster,Inc.is considering an eight-year project that has an initial after-tax outlay or after-tax cost of $180,000.The future after-tax cash inflows from its project for years 1 through 8 are the same at $35,000.Webster uses the net present value method and has a discount rate of 12%.Will Webster accept the project?
A)Webster accepts the project because the NPV is over $10,000.
B)Webster accepts the project because the NPV is about $6,141.
C)Webster rejects the project because the NPV is about -$6,133.
D)Webster rejects the project because the NPV is below -$7,000.

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount the future cash inflows using the discount rate of 12%.

Year 1-8 cash inflow: $35,000

NPV = (35,000/1.12)^1 + (35,000/1.12)^2 + ... + (35,000/1.12)^8 - 180,000
NPV = $6,132.84 - 180,000
NPV = -$173,867.16

Since the NPV is negative, Webster should reject the project. Therefore, option C is correct.