A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years.If the firm's required return or cost of capital is 10%, the NPV of the project is:

Question

Quizplus · Accepted Answer

To calculate the NPV of the project, we need to discount the cash flows using the required rate of return:

NPV = -initial investment + PV of cash flows
NPV = -$50,000 + $15,000/(1+0.1)^1 + $15,000/(1+0.1)^2 + $15,000/(1+0.1)^3 + $15,000/(1+0.1)^4 + $15,000/(1+0.1)^5
NPV = -$50,000 + $12,500 + $11,364 + $10,331 + $9,390 + $8,531
NPV = $6,862

Therefore, the NPV of the project is $6,862, so the best answer choice is B.

A Firm Is Evaluating a Proposal Which Has an Initial