A company is looking to invest in a very risky project. They have a required rate of return of 27% compounded annually. The project has the following cash inflows: Year 1 $17500, Year 2 $15000, Year 3 $27500. It also has the following cash outflows: Immediately -$10 000, Year 1 -$15 000, Year 3 -$9500. What is the NPV?
A) $9718.06
B) $7918.06
C) $7819.06
D) $9918.06
E) -$9718.06

Question

Quizplus · Accepted Answer

The Net Present Value (NPV) is calculated by discounting the cash inflows and outflows at the required rate of return and then summing those values. The formula for NPV is: NPV = Σ {Cash Flow / (1 + r)^t} - Initial Investment, where r is the discount rate (27% in this case), and t is the time period.1. Initial outflow: -$10,000 (already at present value)2. Year 1 inflow: $17,500 / (1 + 0.27)^1 = $13,779.53   Year 1 outflow: -$15,000 / (1 + 0.27)^1 = -$11,811.023. Year 2 inflow: $15,000 / (1 + 0.27)^2 = $9,317.674. Year 3 inflow: $27,500 / (1 + 0.27)^3 = $15,632.88   Year 3 outflow: -$9,500 / (1 + 0.27)^3 = -$6,800.99Adding these values:NPV = -$10,000 + $13,779.53 - $11,811.02 + $9,317.67 + $15,632.88 - $6,800.99 = $7918.06Therefore, the correct answer is B) $7918.06.

A Company Is Looking to Invest in a Very Risky