Third State Bank wants to add a new branch office.It has determined that the cost of construction of the new facility will be $1.5 million with another $500,000 in organizational costs.The bank has estimated that it will generate $319,522 per year in net revenues for 20 years.If Third State requires a 17% return on its money,what is this project's net present value?
A)$201,805
B)-$201,805
C)$1,798,195
D)-$1,798,195
E)$298,195

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by subtracting the initial investment from the present value of cash inflows. The present value of the cash inflows is calculated using the formula for the present value of an annuity. Given the cash inflow of $319,522 per year for 20 years and a discount rate of 17%, the present value of the inflows is less than the total initial investment of $2 million, resulting in a negative NPV of -$201,805.

Third State Bank Wants to Add a New Branch Office