What is the NPV for a project if its cost of capital is 12 percent and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and ($1,300,000) in year 4?

Question

Quizplus · Accepted Answer

To calculate the NPV of the project, we need to discount the expected cash flows at the cost of capital of 12% and subtract the initial after-tax cost. Using a financial calculator or Excel, we get:

NPV = -$5,000,000 + ($1,800,000 / 1.12) + ($1,900,000 / 1.12^2) + ($1,700,000 / 1.12^3) + ($1,300,000 / 1.12^4)
NPV = -$1,494,336

Since the NPV is negative, the project would not be a good investment at the cost of capital of 12%. Therefore, the best choice is A) -$1,494,336.

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