Edmundo Services is considering an investment of $25,000. Data related to the investment are as follows: Cost of capital is 14 percent.
What is the net present value of the investment, assuming no taxes are paid?

Question

Edmundo Services is considering an investment of $25,000. Data related to the investment are as follows:  Cost of capital is 14 percent.
What is the net present value of the investment, assuming no taxes are paid?

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount all future cash flows using the cost of capital. Assuming that there are no future cash inflows, the NPV would simply be the initial investment of $25,000 discounted at the cost of capital: 
NPV = -$25,000 / (1 + 0.14) = -$21,929. 
Since the NPV is negative, the investment should not be made. Option B is the closest to this value at $14,294, but it is still not correct. Option C is incorrect because it assumes that the investment has a positive NPV of $25,000, which is not the case. Option D is also incorrect because it assumes that there are additional cash inflows beyond the initial investment, which is not given in the question.

Edmundo Services Is Considering an Investment of $25,000