A company buys equipment for $15 000 today and has annual net cash inflows of $6000 for 3 years. The discount rate is 12% compounded annually. What is the Net Present Value (NPV)?
A) -$525.90
B) $552.90
C) $992.50
D) $652.90
E) -$652.90

Question

Quizplus · Accepted Answer

The NPV is calculated by discounting the future cash inflows back to their present value and subtracting the initial investment. The formula for NPV is: NPV = (Cash inflow / (1 + r)^n) - initial investment, where r is the discount rate and n is the period. For each year: Year 1: 6000 / (1.12)^1 = 5357.14 Year 2: 6000 / (1.12)^2 = 4784.82 Year 3: 6000 / (1.12)^3 = 4271.27 Total PV of cash inflows = 5357.14 + 4784.82 + 4271.27 = 14413.23 NPV = 14413.23 - 15000 = -$586.77 (rounded to the nearest option gives -$525.90).

A Company Buys Equipment for $15 000 Today and Has