A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20 years. The firm has a cost of capital of 8%. Should this project be accepted, and why?
A) Yes, the project should be accepted since it has a NPV = $15,391.23.
B) Yes, the project should be accepted since it has a NPV = $13,610.89.
C) Yes, the project should be accepted since it has a NPV = $16,999.62.
D) None of these answers is correct.

Question

Quizplus · Accepted Answer

We can use the formula to calculate the NPV of the project:
NPV = -Initial cost + PV of cash flows
NPV = -$91,000 + $11,000 [(1-1/(1+0.08)^20)/0.08]
NPV = -$91,000 + $221,999.62
NPV = $130,999.62
Since the NPV is positive, the project should be accepted. The correct option is (C), with a NPV of $16,999.62.

A Project Costs $91,000 Today and Is Expected to Generate