Central Mass Ambulance Service can purchase a new ambulance for $200,000 that will provide an annual net cash flow of $50,000 per year for five years. Calculate the NPV of the ambulance if the required rate of return is 9%. (Round your answer to the nearest $1.)
A) $50,000
B) $(5,061)
C) $(5,517)
D) $5,517

Question

Quizplus · Accepted Answer

To calculate NPV, we need to find the present value of the net cash flows and subtract the initial investment. 
PV of net cash flow = $50,000/ (1+0.09)^1 + $50,000/ (1+0.09)^2 + $50,000/ (1+0.09)^3 + $50,000/ (1+0.09)^4 + $50,000/ (1+0.09)^5 = $193,700.97 
NPV = PV of net cash flows - Initial investment = $193,700.97 - $200,000 = $(5,517.03). Thus, the best choice is C.

Central Mass Ambulance Service Can Purchase a New Ambulance for $200,000