A capacity alternative has an initial cost of $50,000 and cash flow of $20,000 for each of the next four years. If the cost of capital is 5 percent, the net present value of this investment is
A) greater than $80,000
B) greater than $130,000
C) less than $30,000
D) Impossible to calculate, because no interest rate is given.
E) Impossible to calculate, because variable costs are not known.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows back to their present value and subtracting the initial investment. Using a 5% discount rate, the NPV of this investment is less than $30,000, not greater than $80,000 or $130,000, and it can be calculated without knowing the variable costs or having an additional interest rate because the cost of capital (5%) acts as the discount rate.

A Capacity Alternative Has an Initial Cost of $50,000 and Cash