Use the information below to answer the following question(s).
Wet Water Company drills residential and commercial wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below:
Note: Other than the initial investment, cash flows are end of period.
-What is the net present value of the investment?
A) $(25,540)
B) $39,579
C) $34,507
D) $44,000
E) $18,115

Question

Use the information below to answer the following question(s).
Wet Water Company drills residential and commercial wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below:
  Note: Other than the initial investment, cash flows are end of period.
-What is the net present value of the investment?
A) $(25,540) 
B) $39,579 
C) $34,507 
D) $44,000 
E) $18,115

Quizplus · Accepted Answer

To calculate the net present value (NPV), we first need to find the present value (PV) of each year's cash flow. Using a discount rate of 10%, we get:
Year 0: -$64,000 (initial investment)
Year 1: $24,000 / 1.1 = $21,818
Year 2: $26,000 / 1.1^2 = $21,077
Year 3: $28,000 / 1.1^3 = $20,408
Year 4: $30,000 / 1.1^4 = $19,802
Year 5: $32,000 / 1.1^5 = $19,254
Now, we sum up the present values and subtract the initial investment:
NPV = -$64,000 + $21,818 + $21,077 + $20,408 + $19,802 + $19,254 = $34,507
Therefore, the net present value of the investment is $34,507. The best choice is C.

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