Approximately how much was paid to invest in a project that has an NPV break-even level of sales of $5 million,cash flows determined by: .1 × sales - $300,000,a six-year life,and an 8 percent discount rate?
A) $416,667
B) $924,576
C) $1,016,678
D) $2,311,450

Question

Quizplus · Accepted Answer

To find the initial investment, we need to use the formula for NPV:

NPV = -Initial Investment + CF1/(1+r) + CF2/(1+r)² + ... + CFn/(1+r)^n

At the break-even level of sales, NPV = 0. So we can set up the equation:

0 = -Initial Investment + CF1/(1+r) + CF2/(1+r)² + ... + CFn/(1+r)^n

Plugging in the values given:
0 = -Initial Investment + (.1 × $5,000,000 - $300,000)/(1+0.08) + (.1 × $5,000,000 - $300,000)/(1+0.08)² + ... + (.1 × $5,000,000 - $300,000)/(1+0.08)^6

Solving for Initial Investment, we get:

Initial Investment = $924,576.39

Therefore, the answer is B.

Approximately How Much Was Paid to Invest in a Project