Miller River Light that manufactures the project will require an initial investment of $350,000.Miller River uses a 12% discount rate for capital projects of this type.What level of operating cash flows over a period of 5 years will cause the project to reach break-even NPV?
A)$70,000.00
B)$97,093.41
C)$92,329.12
D)$86,690.54

Question

Quizplus · Accepted Answer

The correct answer is B because the project will reach break-even NPV when the present value of the operating cash flows over a period of 5 years is equal to the initial investment of $350,000. The present value of the operating cash flows can be calculated using the following formula:PV = CF * (1 - (1 + r)^-n) / rwhere:PV is the present valueCF is the annual operating cash flowr is the discount raten is the number of yearsUsing this formula, we can calculate the present value of the operating cash flows for each of the five years:Year 1: PV = CF * (1 - (1 + 0.12)^-1) / 0.12 = CF * 0.8929Year 2: PV = CF * (1 - (1 + 0.12)^-2) / 0.12 = CF * 0.7972Year 3: PV = CF * (1 - (1 + 0.12)^-3) / 0.12 = CF * 0.7118Year 4: PV = CF * (1 - (1 + 0.12)^-4) / 0.12 = CF * 0.6355Year 5: PV = CF * (1 - (1 + 0.12)^-5) / 0.12 = CF * 0.5674The total present value of the operating cash flows over a period of 5 years is:PV = CF * (0.8929 + 0.7972 + 0.7118 + 0.6355 + 0.5674) = CF * 3.6048Setting this equal to the initial investment of $350,000, we get:3.6048 * CF = $350,000CF = $97,093.41Therefore, the level of operating cash flows over a period of 5 years that will cause the project to reach break-even NPV is $97,093.41.

Miller River Light That Manufactures the Project Will Require an Initial