Oriental Company has gathered the following data on a proposed investment project:

The company uses straight-line depreciation on all equipment. (Ignore income taxes in this problem.)
-What would be the net present value of this investment?
A) ($14,350).
B) $77,200.
C) $107,250.
D) $200,000.

Question

Oriental Company has gathered the following data on a proposed investment project:

The company uses straight-line depreciation on all equipment. (Ignore income taxes in this problem.)
-What would be the net present value of this investment?
A) ($14,350). 
B) $77,200. 
C) $107,250. 
D) $200,000.

Quizplus · Accepted Answer

We need to calculate the present value of all cash inflows and outflows using the given discount rate of 12% and then subtract the initial investment of $100,000.

Present value of cash inflows:
Year 1: $42,000/(1.12)^1 = $37,500
Year 2: $56,000/(1.12)^2 = $45,611
Year 3: $85,000/(1.12)^3 = $62,366
Year 4: $114,000/(1.12)^4 = $75,860

Present value of cash outflow: 
Year 0: -$100,000

Net present value = Present value of inflows - Present value of outflows
= ($37,500 + $45,611 + $62,366 + $75,860) - $100,000
= $121,337 - $100,000
= $21,337

Therefore, the net present value of the investment is $21,337 which is positive, indicating that it is a profitable investment. The best choice is option C.

Oriental Company Has Gathered the Following Data on a Proposed