Project Zeta is expected to produce after-tax cash flows $30 million in year 1,$40 million in year 2,and $50 million in year 3.If the company uses a 12% required rate of return,what is the most it can invest in this project and break even with respect to NPV?
A)$69.03 million
B)$94.26 million
C)$1,11 million
D)$120 million

Question

Quizplus · Accepted Answer

We can calculate the NPV of the project as follows:

NPV = (-Investment) + (CF1 / (1 + r)^1) + (CF2 / (1 + r)^2) + (CF3 / (1 + r)^3)

We want the NPV to be equal to zero, so we can solve for the investment:

Investment = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + CF3 / (1 + r)^3

Investment = 30 / (1 + 0.12)^1 + 40 / (1 + 0.12)^2 + 50 / (1 + 0.12)^3
Investment = 69.26 million

Therefore, the most the company can invest in this project and break even with respect to NPV is $94.26 million, which is option B.

Project Zeta Is Expected to Produce After-Tax Cash Flows $30