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 6 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 6 percent discount rate is

Quizplus · Accepted Answer

We can calculate the net present value (NPV) by discounting each cash flow using the discount rate of 6% and adding them up. The formula for NPV is:

NPV = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + CF3 / (1 + r)^3 + CF4 / (1 + r)^4 - Initial investment

Substituting the values from the problem, we get:

NPV = 20,000 / (1 + 0.06)^1 + 35,000 / (1 + 0.06)^2 + 40,000 / (1 + 0.06)^3 + 25,000 / (1 + 0.06)^4 - 100,000

NPV = $88,632

Therefore, the best choice is A) $88,632. This project is expected to generate positive net present value, which means that it is a good investment opportunity.

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