A not-for-profit company purchased an asset at a cost of $60,000.Annual operating cash flows are expected to be $20,000 each year for 4 years.At the end of the asset life,there will be no residual (salvage)value.Ignore income taxes.What is the net present value if the cost of capital is 10 percent?

Question

Quizplus · Accepted Answer

To calculate the net present value, we need to discount the expected cash flows back to the present using the cost of capital of 10%.

Using the formula for present value of an annuity, we can calculate the present value of the operating cash flows:

PV = C x [1 - (1 + r)^-n] / r
PV = $20,000 x [1 - (1 + 0.1)^-4] / 0.1
PV = $20,000 x 3.169
PV = $63,380

To calculate the net present value, we subtract the initial cost of the asset from the present value of the cash flows:

NPV = PV - cost
NPV = $63,380 - $60,000
NPV = $3,380

Therefore, the correct answer is B, $3,397.

A Not-For-Profit Company Purchased an Asset at a Cost of $60,000.Annual