Suppose a project requires an initial investment of $10,000 and it will yield $1,500 for 8 years.The discount rate is 10%.What is the NPV of the project and should we accept or reject it?

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount each cash flow to its present value and then subtract the initial investment.

PV of cash inflows = $1,500 x (1-(1+0.10)^-8)/0.10 = $8,577.12

NPV = PV of cash inflows - Initial investment 
     = $8,577.12 - $10,000
     = -$1,997.61

Since the NPV is negative, we should reject the project as it is a loss-making proposition. Therefore, the best choice is A).

Suppose a Project Requires an Initial Investment of $10,000 and It