Energy Project Beta has the following cash flows:CF 0 -$4,000CF 1 $0CF 2 $0CF 3 $1,000CF 4 $3,000CF 5 $7,000If this project has a required rate of return of 10%,will management accept or reject the project?NPV @ r =10% = $3,147 (rounded up)
A)Management would reject the project because there are no cash flows greater than zero in years 1 and 2.
B)Management would reject the project because the project has a NPV of $8,000.
C)Management would reject the project because the project has a NPV of $3,147.
D)Management would reject the project because the project has a NPV of $5,067.

Question

Quizplus · Accepted Answer

To determine whether the project should be accepted or rejected, we need to calculate the net present value (NPV) of the project at the required rate of return of 10%. The NPV is calculated by discounting each cash flow by the required rate of return and adding them up.

Using the formula for NPV: 
NPV = -CF0 + CF1/(1+r)^1 + CF2/(1+r)^2 + CF3/(1+r)^3 + CF4/(1+r)^4 + CF5/(1+r)^5

NPV @ r =10% = -$4,000 + $1,000/(1+0.1)^3 + $3,000/(1+0.1)^4 + $7,000/(1+0.1)^5 
NPV @ r =10% = $3,147

Since the NPV is positive, the project should be accepted. Therefore, choices A, B, and D are incorrect, and the correct answer is C.

Energy Project Beta Has the Following Cash Flows:CF 0 -$4,000CF