A proposed project requires an initial cash outlay of $849,000 for equipment and an additional cash outlay of $48,500 in year 1 to cover operating costs.During years 2 through 4,the project will generate cash inflows of $354,000 a year.What is the net present value of this project at a discount rate of 13 percent? Round your answer to the nearest whole dollar.
A)-$152,232
B)-$66,391
C)$67,333
D)$128,612
E)$239,602

Question

Quizplus · Accepted Answer

We need to find the present value of all cash flows using a discount rate of 13%.

Year 0:
- Initial cash outlay = $849,000
PV(year 0) = -$849,000

Year 1:
- Operating costs = $48,500
PV(year 1) = -$48,500 / (1 + 13%)^1 = -$42,920.35

Years 2-4:
- Cash inflow = $354,000 per year
PV(year 2-4) = $354,000 / (1 + 13%)^2 + $354,000 / (1 + 13%)^3 + $354,000 / (1 + 13%)^4 = $856,250.33

Net Present Value (NPV) = PV(year 0) + PV(year 1) + PV(year 2-4)
= -$849,000 - $42,920.35 + $856,250.33
= -$152,232.02

Therefore, the best choice is (A) with a negative NPV, indicating that the project is not financially feasible with a discount rate of 13%.

A Proposed Project Requires an Initial Cash Outlay of $849,000