Cromwell Industries is considering a new project which will have costs, revenues, etc. as shown by the data above. If the cost of capital is 8.0%, what is the net present value (NPV)of this project?

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount all the cash flows to the present value and subtract the initial investment from it. Using a financial calculator or Excel, we get:

NPV = -$350,000 + $40,000/(1+8%) + $85,000/(1+8%)^2 + $125,000/(1+8%)^3 + $180,000/(1+8%)^4
= -$350,000 + $37,037.04 + $70,172.69 + $96,604.47 + $127,798.69
= $62,958.90 (rounded to the nearest cent)

Since the NPV is positive, the project should be accepted.

Cromwell Industries Is Considering a New Project Which Will Have