Horn Corporation is considering investing in a four-year project.Cash inflows from the project are expected to be as follows: Year 1,$2,000; Year 2,$2,200; Year 3,$2,400; Year 4,$2,600.If using a discount rate of 8%,the project has a positive net present value of $500,what was the amount of the original investment? (Ignore income taxes in this problem.)(Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

Question

Quizplus · Accepted Answer

We can find the present value of the cash inflows using the formula:
PV = CF/(1+r)^n
where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of years.

Using the given cash inflows and discount rate, we can calculate the present value of the project as follows:

PV1 = 2000/(1+0.08)^1 = 1851.85
PV2 = 2200/(1+0.08)^2 = 1905.04
PV3 = 2400/(1+0.08)^3 = 1959.27
PV4 = 2600/(1+0.08)^4 = 2014.55

Now, we can find the present value of the project as the sum of the present values of the cash inflows:
PV = PV1 + PV2 + PV3 + PV4 = 7730.71

Since the project has a positive net present value of $500, the initial investment must have been:
Initial Investment = PV - NPV = $7730.71 - $500 = $7054. Therefore, the answer is C.

Horn Corporation Is Considering Investing in a Four-Year Project