A project requires an investment of $900 today.It can generate sales of $1,100 per year forever.Costs are $600 for the first year and will increase by 20% per year.(Assume all sales and costs occur at year-end,i.e.,costs are $600 @ t = 1.)Ignore taxes and calculate the NPV of the project at a 12% discount rate.
A)$65.00
B)$57.51
C)$100.00
D)Cannot be calculated as g rNPV = -900 + (1,100 - 600)/1.12 + (1,100 - (600 × 1.2))/(1.12^2)+ (1,100 - 600 (1.2^2))/(1.12)^3 + (1,100 - 600 (1.2^3))/(1.12^4)= $57.51).

Question

A project requires an investment of $900 today.It can generate sales of $1,100 per year forever.Costs are $600 for the first year and will increase by 20% per year.(Assume all sales and costs occur at year-end,i.e.,costs are $600 @ t = 1.)Ignore taxes and calculate the NPV of the project at a 12% discount rate.
A)$65.00
B)$57.51
C)$100.00
D)Cannot be calculated as g > rNPV = -900 + (1,100 - 600)/1.12 + (1,100 - (600 × 1.2))/(1.12^2)+ (1,100 - 600 (1.2^2))/(1.12)^3 + (1,100 - 600 (1.2^3))/(1.12^4)= $57.51).

Quizplus · Accepted Answer

The NPV of the project is calculated as $57.51, which is positive and therefore indicates that the project is expected to generate positive returns and is a worthwhile investment. Therefore, the best choice is B.

A Project Requires an Investment of $900 Today