A project will produce an operating cash flow of $7,300 a year for three years. The initial cash investment in the project will be $11,600. The net after-tax salvage value is estimated at $3,500 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 11%?
A) $8,798.29
B) $9,896.87
C) $10,072.72
D) $13,353.41
E) $20,398.29

Question

Quizplus · Accepted Answer

The correct answer is A. The net present value of the project is $8,798.29. This is calculated by taking the present value of the cash flows and subtracting the initial investment. The present value of the cash flows is calculated by multiplying each cash flow by the present value factor for the appropriate year. The present value factor is calculated by dividing 1 by (1 + r)^n, where r is the required rate of return and n is the number of years. In this case, the required rate of return is 11% and the cash flows occur over three years. Therefore, the present value factor for year 1 is 1 / (1 + 0.11)^1 = 0.9009, the present value factor for year 2 is 1 / (1 + 0.11)^2 = 0.8116, and the present value factor for year 3 is 1 / (1 + 0.11)^3 = 0.7312. The present value of the cash flows is therefore $7,300 x 0.9009 + $7,300 x 0.8116 + $10,800 x 0.7312 = $19,398.29. The net present value is then $19,398.29 - $11,600 = $8,798.29.

A Project Will Produce an Operating Cash Flow of $7,300