A project manager is using the net present value method to make the final decision on which project to undertake.The company has a 12% required rate of return and expects a 3% rate of inflation for the following four years.What is the NPV of a project that has cash flows as shown in the table? $$\begin{array} { | l | l | }
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - \$ 250,000 \
\hline 1 & \$ 50,000 \
\hline 2 & \$ 60,000 \
\hline 3 & \$ 70,000 \
\hline 4 & \$ 80,000 \
\hline
\end{array}$$
A) -$9,762
B) -$56,859
C) -$69,387
D) -$98,780

Question

A project manager is using the net present value method to make the final decision on which project to undertake.The company has a 12% required rate of return and expects a 3% rate of inflation for the following four years.What is the NPV of a project that has cash flows as shown in the table? $$\begin{array} { | l | l | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - \$ 250,000 \
\hline 1 & \$ 50,000 \
\hline 2 & \$ 60,000 \
\hline 3 & \$ 70,000 \
\hline 4 & \$ 80,000 \
\hline
\end{array}$$
A) -$9,762
B) -$56,859
C) -$69,387
D) -$98,780

Quizplus · Accepted Answer

First, we need to calculate the present value of each cash flow using the following formula:

PV = CF / (1 + r)^n

Where:

PV = present value 
CF = cash flow 
r = required rate of return 
n = time period

Using the given cash flows and the formula above, we can calculate the present value for each year:

PV(Year 0) = -\$250,000 
PV(Year 1) = \$48,543 
PV(Year 2) = \$54,720 
PV(Year 3) = \$60,657 
PV(Year 4) = \$66,382

To find the net present value (NPV), we simply add up the present values and subtract the initial investment:

NPV = PV(Year 0) + PV(Year 1) + PV(Year 2) + PV(Year 3) + PV(Year 4)

NPV = -\$250,000 + \$48,543 + \$54,720 + \$60,657 + \$66,382

NPV = -$69,387

Since the NPV is negative, this project would not be a good investment. The company would actually lose money by undertaking this project. Therefore, the best choice is to not choose this project.

A Project Manager Is Using the Net Present Value Method