A project has an initial investment of $150. You have come up with the following estimates of revenues and costs. Calculate the NPV assuming that cash flow and perpetuities. (No taxes.) (Cost of capital = 10%)
A) 50, -100, +400
B) -50, +300, +500
C) -100, +150, +350
D) None of the above

Question

A project has an initial investment of $150. You have come up with the following estimates of revenues and costs. Calculate the NPV assuming that cash flow and perpetuities. (No taxes.) (Cost of capital = 10%) 
A) 50, -100, +400 
B) -50, +300, +500 
C) -100, +150, +350 
D) None of the above

Quizplus · Accepted Answer

To calculate the NPV, we need to find the present value of each cash flow using the cost of capital of 10%. We also need to add the initial investment of $150.

PV (Year 1) = 150/(1+0.10)^1 = $136.36
PV (Year 2) = (-100)/(1+0.10)^2 = $81.82
PV (Year 3 and forever) = [150/(0.10*1)][1/(1+0.10)^3] = $1176.19

NPV = -$150 + $136.36 + $81.82 + $1176.19 = $1244.37

Therefore, the best choice is C as it has the highest NPV.

A Project Has an Initial Investment of $150