Heartland,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 $38,000.Heartland uses the net present value method and has a discount rate of 11.50%.Will Heartland accept the project?

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount the future cash inflows to present value using the given discount rate of 11.50%. Then, we subtract the initial cost from the present value of future cash inflows to get the NPV.

NPV = PV of future cash inflows - Initial cost
PV of future cash inflows = $38,000 x {(1 - (1 + 0.115)^-8) / 0.115} = $229,044
NPV = $229,044 - $180,000 = $49,044

Since the NPV is positive, Heartland should accept the project because it is expected to add value to the company's wealth. Therefore, the correct answer is A.