A company has policy to invest in new opportunities if the investment has a positive NPV. See data below:
$$\begin{array} { | r | r | }
\hline \text { Initial investment } & \$ 105,000 \
\hline \text { Yearly cash flows } & \$ 30,000 \
\hline \text { Number. of years } & 4 \
\hline \text { Residual value } & \$ 10,000 \
\hline
\end{array}$$
$\begin{array}{|l|l|l|l|l|l|l|}
\hline \text { Present}\
\text {Value of an}\
\text {Annuity of}\
\$ 1 \
\hline &5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \%\
\hline 1& 0.95 & 0.943 & 0.93 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.859 & 1.833 & 1.809 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.729 & 2.673 & 2.624 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.546 & 3.465 & 3.387 & 3.312 & 3.240 & 3.170 \
\hline 5 & 4.329 & 4.212 & 4.10 d & 3.993 & 3.890 & 3.791 \
\hline
\end{array}$

$\begin{array}{|r|r|r|r|r|r|r|}
\hline\text {Present Value of }\
\$ 1\
\hline & 5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \% \
\hline 1 & 0.952 & 0.943 & 0.935 & 0.92 & 0.917 & 0.909 \
\hline 2 & 0.907 & 0.890 & 0.873 & 0.857 & 0.84 & 0.826 \
\hline 3 & 0.864 & 0.840 & 0.816 & 0.794 & 0.777 & 0.751 \
\hline 4 & 0.823 & 0.792 & 0.763 & 0.733 & 0.70 & 0.683 \
\hline 5 & 0.784 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \
\hline
\end{array}$
If the company has a hurdle rate of 6%, this investment will yield a positive NPV and should be accepted.

Question

A company has policy to invest in new opportunities if the investment has a positive NPV. See data below:
 $$\begin{array} { | r | r | } 
\hline \text { Initial investment } & \$ 105,000 \
\hline \text { Yearly cash flows } & \$ 30,000 \
\hline \text { Number. of years } & 4 \
\hline \text { Residual value } & \$ 10,000 \
\hline
\end{array}$$ 
 $\begin{array}{|l|l|l|l|l|l|l|}
\hline \text { Present}\
\text {Value of an}\
\text {Annuity of}\
 \$ 1 \ 
\hline &5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \%\ 
\hline 1& 0.95 & 0.943 & 0.93 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.859 & 1.833 & 1.809 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.729 & 2.673 & 2.624 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.546 & 3.465 & 3.387 & 3.312 & 3.240 & 3.170 \
\hline 5 & 4.329 & 4.212 & 4.10 d & 3.993 & 3.890 & 3.791 \
\hline
\end{array}$

$\begin{array}{|r|r|r|r|r|r|r|} 
\hline\text {Present Value of  }\
\$ 1\  
\hline  & 5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \% \
\hline 1 & 0.952 & 0.943 & 0.935 & 0.92 & 0.917 & 0.909 \
\hline 2 & 0.907 & 0.890 & 0.873 & 0.857 & 0.84 & 0.826 \
\hline 3 & 0.864 & 0.840 & 0.816 & 0.794 & 0.777 & 0.751 \
\hline 4 & 0.823 & 0.792 & 0.763 & 0.733 & 0.70 & 0.683 \
\hline 5 & 0.784 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \
\hline
\end{array}$   
If the company has a hurdle rate of 6%, this investment will yield a positive NPV and should be accepted.

Quizplus · Accepted Answer

The NPV is calculated as the present value of the cash flows minus the initial investment. Using the present value of an annuity of $1 table, the present value of the cash flows is $105,000 + $30,000 * 3.465 = $144,950. The NPV is therefore $144,950 - $105,000 = $39,950, which is positive. Therefore, the investment should be accepted.

A Company Has Policy to Invest in New Opportunities If