A capital investment project requires an investment of $100,000 and has an expected life of four years. Annual cash flows at the end of each year are expected to be as follows: Ignoring income taxes, the net present value of the project using a 8 percent discount rate is

Question

A capital investment project requires an investment of $100,000 and has an expected life of four years. Annual cash flows at the end of each year are expected to be as follows:  Ignoring income taxes, the net present value of the project using a 8 percent discount rate is

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the project, we need to discount the cash flows back to their present values using the given discount rate of 8%. The NPV is then calculated by subtracting the initial investment from the sum of the discounted cash flows.

Using a financial calculator or spreadsheet, we can calculate the present value (PV) of each cash flow as follows: 
Year 1: PV = $10,000 / (1+0.08)^1 = $9,259.26 
Year 2: PV = $30,000 / (1+0.08)^2 = $25,990.78 
Year 3: PV = $50,000 / (1+0.08)^3 = $41,994.75 
Year 4: PV = $40,000 / (1+0.08)^4 = $29,049.89

The sum of the present values of the cash flows is: 
$9,259.26 + $25,990.78 + $41,994.75 + $29,049.89 = $106,294.68

The net present value of the project is then: 
NPV = $106,294.68 - $100,000 = $6,294.68

Therefore, the correct answer is B) $49,680.

A Capital Investment Project Requires an Investment of $100,000 and Has