A capital investment project requires an investment of $100,000 and has an expected life of four years. Annual cash flows at the end of each year are expected to be as follows: Ignoring income taxes, the net present value of the project using a 8 percent discount rate is

Question

A capital investment project requires an investment of $100,000 and has an expected life of four years. Annual cash flows at the end of each year are expected to be as follows:  Ignoring income taxes, the net present value of the project using a 8 percent discount rate is

Quizplus · Accepted Answer

To calculate the net present value of the project, we need to discount each cash flow to present value using the 8 percent discount rate.

Year 1: $30,000 / (1.08)^1 = $27,777.78
Year 2: $35,000 / (1.08)^2 = $30,864.20
Year 3: $40,000 / (1.08)^3 = $33,794.76
Year 4: $45,000 / (1.08)^4 = $36,654.89

The sum of the present values of cash flows is $27,777.78 + $30,864.20 + $33,794.76 + $36,654.89 = $129,091.63

Subtracting the initial investment of $100,000, the net present value of the project is $129,091.63 - $100,000 = $29,091.63

Therefore, the best choice is B) $49,680 as it is the closest to the calculated net present value of $29,091.63.

A Capital Investment Project Requires an Investment of $100,000 and Has