(Ignore income taxes in this problem. )The following data pertain to an investment proposal: The net present value of the proposed investment is closest to:

Question

(Ignore income taxes in this problem. )The following data pertain to an investment proposal:  The net present value of the proposed investment is closest to:

Quizplus · Accepted Answer

The net present value (NPV) is calculated as the present value of the future cash inflows minus the initial investment. Using a discount rate of 10%, we can calculate the present value of each cash inflow as follows:

Year 1: $2,000 / (1 + 0.10)^1 = $1,818.18
Year 2: $3,000 / (1 + 0.10)^2 = $2,479.34
Year 3: $4,000 / (1 + 0.10)^3 = $3,170.12
Year 4: $5,000 / (1 + 0.10)^4 = $3,790.79

The total present value of the cash inflows is $11,258.43. Subtracting the initial investment of $6,545 gives us a NPV of $4,713. Therefore, the best choice is A) $4,713.

(Ignore Income Taxes in This Problem