Leonard,Inc.is considering a five-year project that has an initial after-tax outlay or after-tax cost of $70,000.The future after-tax cash inflows from its project for years 1,2,3,4 and 5 are all the same at $35,000.Leonard uses the net present value method and has a discount rate of 10%.Will Leonard accept the project?
A)Leonard accepts the project because the NPV is about $69,455.
B)Leonard accepts the project because the NPV is about $62,678.
C)Leonard rejects the project because the NPV is about -$13,382.
D)Leonard rejects the project because the NPV is less than -$33,021.

Question

Quizplus · Accepted Answer

Leonard accepts the project because the NPV, calculated using the formula for the present value of an annuity (since the cash inflows are the same for each year), is positive, indicating that the project's returns exceed the initial investment when discounted at the project's discount rate of 10%.