Harvard Investments is considering an opportunity which will require an initial outlay of $100,000 but will return cash flows for the next 5 years as follows: $10,000 in Year 1, $20,000 in Year 2, $30,000 in Year 3, $40,000 in Year 4, and $50,000 in Year 5. If Harvard uses a discount rate of 9%, how much is the NPV of the project?

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount each cash flow back to its present value and then add them together. Using a discount rate of 9%, we can calculate the present value of each cash flow as follows:

Year 1: $10,000 / (1 + 0.09)^1 = $9,174.31
Year 2: $20,000 / (1 + 0.09)^2 = $16,528.93
Year 3: $30,000 / (1 + 0.09)^3 = $21,642.02
Year 4: $40,000 / (1 + 0.09)^4 = $26,246.91
Year 5: $50,000 / (1 + 0.09)^5 = $30,157.76

Now we can add up the present values of the cash flows:
$9,174.31 + $16,528.93 + $21,642.02 + $26,246.91 + $30,157.76 = $103,749.92

Because the initial outlay was $100,000, the NPV is:
$103,749.92 - $100,000 = $3,749.92

Therefore, the correct answer is C) $9,990 positive.

Harvard Investments Is Considering an Opportunity Which Will Require an Initial