Strange Manufacturing Company is purchasing a production facility at a cost of $21 million. The company expects the project to generate annual cash flows of $7 million over the next five years. Its cost of capital is 18 percent. Net present value: What is the net present value of this project?

Question

Quizplus · Accepted Answer

The correct answer is A because the net present value of the project is $890,197. This is calculated by taking the present value of the future cash flows and subtracting the initial investment. The present value of the future cash flows is calculated by multiplying each cash flow by the present value factor, which is calculated using the cost of capital and the number of years until the cash flow is received. The initial investment is the cost of the production facility.

Strange Manufacturing Company Is Purchasing a Production Facility at a Cost