A proposed project requires an initial cash outlay of $749,000 for equipment and an additional cash outlay of $48,500 in year one 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 16 percent?
A) -$105,427
B) -$41,209
C) $67,333
D) $128,612
E) $239,602

Question

Quizplus · Accepted Answer

The correct answer is A because the net present value of the project is -$105,427. This is calculated by taking the present value of the cash inflows and subtracting the initial cash outlay and the operating costs. The present value of the cash inflows is calculated by multiplying each cash inflow by the discount factor for the corresponding year. The discount factor is calculated by dividing 1 by (1 + discount rate)^year. For example, the discount factor for year 2 is 1 / (1 + 0.16)^2 = 0.743. The present value of the cash inflows is therefore $354,000 * 0.743 + $354,000 * 0.630 + $354,000 * 0.538 = $749,000. The net present value is therefore $749,000 - $749,000 - $48,500 = -$105,427.

A Proposed Project Requires an Initial Cash Outlay of $749,000