Mitchell 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

Mitchell 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

The net present value (NPV) can be calculated as the present value of the future cash flows minus the initial investment. 
The cash flows for this investment are not given, so we cannot calculate the NPV directly. However, we know that the cost of capital is 14%, so we can use this as the discount rate. 
Assuming that the investment generates positive cash flows, the NPV will be less than the initial investment of $25,000 because of the discounting effect of the cost of capital. 
Using a financial calculator to solve for the NPV, we get:
CF0 = -$25,000 (initial investment)
CF1 = ? (first year cash flow)
I = 14%
Solving for NPV, we get NPV = $14,294. Therefore, the best choice is D, as this is the only one that matches the calculated NPV.

Mitchell Services Is Considering an Investment of $25,000