Geronimo, Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000. Geronimo uses the net present value method and has a discount rate of 11%. Will Geronimo accept the project?
A) Geronimo accepts the project because the NPV is greater than $10,000.00.
B) Geronimo rejects the project because the NPV is about -$22,375.73.
C) Geronimo rejects the project because the NPV is about -$12,375.60.
D) Geronimo rejects the project because the NPV is about -$2,375.60.

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount each future cash inflow to its present value, and then subtract the initial cost. Using a discount rate of 11%, we have:

Year 1: $50,000 / (1 + 0.11)^1 = $44,954.95
Year 2: $60,000 / (1 + 0.11)^2 = $46,755.38
Year 3: $70,000 / (1 + 0.11)^3 = $48,617.09
Year 4: $80,000 / (1 + 0.11)^4 = $50,540.99

NPV = -$220,000 + $44,954.95 + $46,755.38 + $48,617.09 + $50,540.99 = -$29,131.59

Since the NPV is negative (-$29,131.59), Geronimo should reject the project. Therefore, the correct answer is B.