Benjamin Ltd invested in a 3-year project and expects a 15% rate of return. Annual cash inflows from the project are: year 1 $8,000; year 2 $8,500; and year 3 $9,500. The net present value is $4,000. What was the amount of the original investment? Ignore income taxes.

Question

Quizplus · Accepted Answer

The net present value formula is:

NPV = Present Value of Cash Inflows - Initial Investment

We are given that the NPV is $4,000 and the expected rate of return is 15%, so we can use the formula:

$4,000 = $8,000/(1 + 0.15)^1 + $8,500/(1 + 0.15)^2 + $9,500/(1 + 0.15)^3 - Initial Investment

Solving for the initial investment, we get:

Initial Investment = $15,637

Therefore, the answer is B, $15,637.

Benjamin Ltd Invested in a 3-Year Project and Expects a 15