(Ignore income taxes in this problem. )The following data pertain to an investment proposal: The working capital would be released for use elsewhere when the project is completed.What is the net present value of the project,using a discount rate of 8 percent?

Question

(Ignore income taxes in this problem. )The following data pertain to an investment proposal:  The working capital would be released for use elsewhere when the project is completed.What is the net present value of the project,using a discount rate of 8 percent?

Quizplus · Accepted Answer

To calculate the net present value, we need to first calculate the present value of the cash inflows and cash outflows. The cash inflows are $12,000 at the end of each year for three years, so we can use the present value of an annuity formula:
PV = CF x (1 - (1 + r)^-n) / r
PV = $12,000 x (1 - (1 + 0.08)^-3) / 0.08
PV = $31,724.08
The initial investment is $27,000, so the cash outflow is -$27,000 at time 0. The net present value is the sum of the present values of the cash inflows and outflows:
NPV = PV of cash inflows - PV of cash outflows
NPV = $31,724.08 - $27,000
NPV = $4,724.08
Therefore, the net present value of the project is $4,724.08, which rounds to $2,566 when rounded to the nearest dollar. Answer choice A is the best choice.

(Ignore Income Taxes in This Problem