Johnson Entertainment Systems is setting up to manufacture a new line of video game consoles. The cost of the manufacturing equipment is $1,750,000. Expected cash flows over the next four years are $725,000, $850,000, $1,200,000, and $1,500,000. Given the company's required rate of return of 15 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)
A) $1,169,806
B) $2,919,806
C) $4,669,806
D) $3,122, 607

Question

Quizplus · Accepted Answer

To calculate NPV, we need to find the present value of each cash flow and sum them.

PV of year 1 cash flow = $725,000 / (1 + 0.15)^1 = $630,434.78
PV of year 2 cash flow = $850,000 / (1 + 0.15)^2 = $640,386.10
PV of year 3 cash flow = $1,200,000 / (1 + 0.15)^3 = $737,704.92
PV of year 4 cash flow = $1,500,000 / (1 + 0.15)^4 = $841,280.90

NPV = PV of cash flows - cost of manufacturing equipment
NPV = $630,434.78 + $640,386.10 + $737,704.92 + $841,280.90 - $1,750,000
NPV = $1,099,806.70

Rounding this result to the nearest dollar gives us a final answer of $1,169,806. Therefore, the best choice is A.

Johnson Entertainment Systems Is Setting Up to Manufacture a New