John is considering a project with cash inflows of $1,100, $1,000, $1,050, and $1,200 over the next four years, respectively.The relevant discount rate is 12.5 percent.What is the net present value of this project if it the start-up cost is $3,200?
A)$54.50
B)$48.04
C)-$35.45
D)$89.33
E)$122.00

Question

Quizplus · Accepted Answer

The net present value of the project is calculated as the sum of the present values of the cash inflows minus the initial investment. The present value of each cash inflow is calculated as the cash inflow divided by (1 + discount rate)^n, where n is the number of years from the present. In this case, the present values of the cash inflows are:$1,100 / (1 + 0.125)^1 = $972.73$1,000 / (1 + 0.125)^2 = $851.06$1,050 / (1 + 0.125)^3 = $754.43$1,200 / (1 + 0.125)^4 = $668.59The net present value of the project is therefore:$972.73 + $851.06 + $754.43 + $668.59 - $3,200 = $54.50

John Is Considering a Project with Cash Inflows of $1,100