A project will produce cash inﬂows of €1,750 a year for four years.The project initially costs €10,600 to get started.In year ﬁve, the project will be closed and as a result should produce a cash inﬂow of
€8,500.What is the net present value of this project if the required rate of return is 13.75%?
A)-€5,474.76
B)-€1,011.40
C)-€935.56
D)€1,011.40
E)€5,474.76

Question

Quizplus · Accepted Answer

To calculate the net present value of the project, we need to discount all the cash flows to their present values and then subtract the initial cost.

Using a financial calculator or Excel, we can find that the present value of the four annual cash inflows of €1,750 each, discounted at 13.75%, is €5,100.17.

Similarly, the present value of the cash inflow of €8,500 at the end of year five, discounted at 13.75%, is €4,414.77.

Therefore, the total present value of all cash inflows is €5,100.17 + €4,414.77 = €9,514.94.

Subtracting the initial cost of €10,600, we get a net present value of -€1,085.06, which is closest to answer choice B, -€1,011.40.

Therefore, the best choice is B.

A Project Will Produce Cash Inﬂows of €1,750 a Year