Gao Enterprises plans to build a new plant at a cost of $3,250,000. The plant is expected to generate annual cash flows of $1,225,000 for the next five years. If the firm's required rate of return is 18 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)
A) $2,875,000
B) $3,830,785
C) $580,785
D) $2, 225,875

Question

Quizplus · Accepted Answer

To calculate NPV, we need to discount the cash flows at the required rate of return.

NPV = -Initial cost + PV of cash flows

PV of cash flows = CF1/ (1+r) + CF2/ (1+r)^2 + ... + CF5/ (1+r)^5

Where, 
CF1 = $1,225,000 
CF2 = $1,225,000 
CF3 = $1,225,000 
CF4 = $1,225,000 
CF5 = $1,225,000 
r = 18%

NPV = -$3,250,000 + ($1,225,000/1.18) + ($1,225,000/1.18^2) + ($1,225,000/1.18^3) + ($1,225,000/1.18^4) + ($1,225,000/1.18^5)

NPV = $580,785

So, the NPV of this project is $580,785. Therefore, the best choice is C.

Gao Enterprises Plans to Build a New Plant at a Cost