Manhattan,Inc.is considering an eight-year project that has an initial after-tax outlay or after-tax cost of $180,000.The future after-tax cash inflows from its project for years 1 through 8 are the same at $38,000.Manhattan uses the net present value method and has a discount rate of 11.50%.Will Manhattan accept the project?
A)Manhattan accepts the project because the NPV is about $12,114.
B)Manhattan accepts the project because the NPV is about $11,114.
C)Manhattan rejects the project because the NPV is about -$11,114.
D)Manhattan rejects the project because the NPV is less than -$12,000.

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount the future cash inflows by the discount rate. Using an NPV calculator or formula, we get the following:
NPV = -$180,000 + ($38,000 / (1+0.1150)^1) + ($38,000 / (1+0.1150)^2) + ... + ($38,000 / (1+0.1150)^8)
NPV = -$180,000 + $34,091 + $30,535 + ... + $10,197 (rounded to nearest dollar)
NPV = $12,114 (rounded to nearest dollar)
Since the NPV is positive, Manhattan should accept the project.