A company is considering an iron ore extraction project that requires an initial investment of $512,000 and will yield annual cash inflows of $156,000 for four years.The company's discount rate is 9%.What is the NPV of the project? Present value of an ordinary annuity of $1:
$$\begin{array} { | c | r | r | r | }
\hline & { 8 \% } & { 9 \% } & { 10 \% } \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.312 & 3.24 & 3.17 \
\hline 5 & 3.993 & 3.89 & 3.791 \
\hline 6 & 4.623 & 4.486 & 4.355 \
\hline 7 & 5.206 & 5.033 & 4.868 \
\hline 8 & 5.747 & 5.535 & 5.335 \
\hline 9 & 6.247 & 5.995 & 5.759 \
\hline 10 & 6.71 & 6.418 & 6.145 \
\hline
\end{array}$$
A) $6,560
B) $(102,400)
C) $102,400
D) $(6,560)

Question

A company is considering an iron ore extraction project that requires an initial investment of $512,000 and will yield annual cash inflows of $156,000 for four years.The company's discount rate is 9%.What is the NPV of the project? Present value of an ordinary annuity of $1:
$$\begin{array} { | c | r | r | r | } 
\hline &  { 8 \% } &  { 9 \% } &  { 10 \% } \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.312 & 3.24 & 3.17 \
\hline 5 & 3.993 & 3.89 & 3.791 \
\hline 6 & 4.623 & 4.486 & 4.355 \
\hline 7 & 5.206 & 5.033 & 4.868 \
\hline 8 & 5.747 & 5.535 & 5.335 \
\hline 9 & 6.247 & 5.995 & 5.759 \
\hline 10 & 6.71 & 6.418 & 6.145 \
\hline
\end{array}$$
A) $6,560
B) $(102,400)
C) $102,400
D) $(6,560)

Quizplus · Accepted Answer

The NPV is calculated as the present value of cash inflows minus the initial investment. Using the 9% column for 4 years, the present value factor is 3.24. Thus, the present value of cash inflows = $156,000 * 3.24 = $505,440. Subtracting the initial investment of $512,000 gives an NPV of $(6,560).

A Company Is Considering an Iron Ore Extraction Project That