A project manager is using the net present value method to make the final decision on which project to undertake.The company has a 12% required rate of return and expects a 3% rate of inflation for the following four years.What is the NPV of a project that has cash flows as shown in the table? $$\begin{array} { | l | l | }
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - \$ 250,000 \
\hline 1 & \$ 50,000 \
\hline 2 & \$ 60,000 \
\hline 3& \$ 70,000 \
\hline 4 & \$ 80,000 \
\hline
\end{array}$$
A)-$9,762
B)-$56,859
C)-$69,387
D)-$98,780

Question

A project manager is using the net present value method to make the final decision on which project to undertake.The company has a 12% required rate of return and expects a 3% rate of inflation for the following four years.What is the NPV of a project that has cash flows as shown in the table? $$\begin{array} { | l | l | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - \$ 250,000 \
\hline 1 & \$ 50,000 \
\hline 2 & \$ 60,000 \
\hline 3& \$ 70,000 \
\hline 4 & \$ 80,000 \
\hline
\end{array}$$
A)-$9,762
B)-$56,859
C)-$69,387
D)-$98,780

Quizplus · Accepted Answer

Using the net present value method, we need to discount each cash flow by the required rate of return adjusted for inflation. The formula for calculating the present value factor is (1 + required rate of return)/(1 + inflation rate).

Applying the formula to the table, we get:

Year 1: -$35,000/(1 + 0.15) = -$30,434
Year 2: $12,000/(1 + 0.15)^2 = $9,224
Year 3: $15,000/(1 + 0.15)^3 = $9,910
Year 4: $20,000/(1 + 0.15)^4 = $11,843

The sum of these present values is -$69,387. This means that the project has a negative NPV and should not be undertaken. Therefore, the best choice is C.

A Project Manager Is Using the Net Present Value Method