Use the following table, $\text { Present Value of an Annuity of } 1$
$\begin{array}{rrrr}\text { Periods } & 8 \% & 9 \% & 10\%\
1 & .926 & .917 & .909 \
2 & 1.783 & 1.759 & 1.736 \
3 & 2.577 & 2.531 & 2.487
\end{array}$ A company has a minimum required rate of return of 9%. It is considering investing in a project which costs $350,000 and is expected to generate cash inflows of $140,000 at the end of each year for three years. The net present value of this project is
A) $354,340.
B) $70,000.
C) $35,436.
D) $4,340.

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the project, we use the present value of an annuity formula. Given the company's minimum required rate of return of 9% and cash inflows of $140,000 for three years, we find the present value factor for 3 periods at 9% from the table, which is 2.531. Multiplying this factor by the annual cash inflow gives us the total present value of the cash inflows: $2.531 \times \$140,000 = \$354,340$. Subtracting the initial investment of $350,000 from this amount gives us the NPV: $\$354,340 - \$350,000 = \$4,340$.

Use the Following Table Present Value of an Annuity of 1\text { Present Value of an Annuity of } 1 Present Value of an Annuity of 1

Use the Following Table $\text { Present Value of an Annuity of } 1$