The BobIU Computer Graphics Co. has just produced a new multimedia graphics chip which will cost $6,000,000 this year to put into production. They anticipate net cash flows of $3 million next year, $2million, $1 million, $.5 million, $.25 million and then $0 over each of the following years. The two owners require a 15% return on their investment. The value of this investment to the firm is:
A) $750,000.10
B) -$811,329.97
C) $556,462.71
D) $652,173.91
E) -$371,782.85

Question

Quizplus · Accepted Answer

The value of this investment to the firm can be calculated using the Net Present Value (NPV) formula. The NPV is the sum of the present values of all cash flows associated with the investment, including the initial investment and the expected future cash flows, each discounted back to the present value using the required rate of return. In this case, the required rate of return is 15%. Calculating the NPV for each year's cash flow and subtracting the initial investment of $6,000,000 gives a negative value, indicating that the investment does not meet the required 15% return and results in a loss, hence the correct answer is -$811,329.97.