Ernestine is analyzing a 4-year project with an initial cost of $87,000,a required rate of return of 14 percent,and a chance of success of 4 percent.If the project succeeds,the annual cash flow will be $1,789,000.If the project fails,the annual cash flow will be -$131,000.The project can be shut down after the first 2 years but all monies invested will be lost.None of the initial cost can be recouped after 4 years.What is the net present value of this project at Time 0?

Question

Quizplus · Accepted Answer

NPV₀ = -$87,000 + 0.04{$1,789,000[(1 - 1 / 1.14⁴)/ 0.14]} + 0.96{-$131,000[(1 - 1 / 1.14²)/ 0.14]} NPV = -$85,578.77

Ernestine Is Analyzing a 4-Year Project with an Initial Cost