A project will produce cash inflows of $3,200 a year for 4 years with a final cash inflow of $5,700 in year 5. The project's initial cost is $9,500. What is the net present value of this project if the required rate of return is 16 percent?
A)-$311.02
B)$2,168.02
C)$4,650.11
D)$9,188.98
E)$21,168.02

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount all the cash inflows to the present value and then subtract the initial cost of the project.

Using the formula:

NPV = -Initial cost + PV of cash inflows

PV = CF/(1+r)^n, where CF is the cash flow, r is the required rate of return, and n is the number of years

Year 1: PV = 3200/(1+0.16)^1 = $2,758.62
Year 2: PV = 3200/(1+0.16)^2 = $2,384.05
Year 3: PV = 3200/(1+0.16)^3 = $2,059.56
Year 4: PV = 3200/(1+0.16)^4 = $1,779.11
Year 5: PV = 5700/(1+0.16)^5 = $2,232.18

NPV = -$9,500 + $2,758.62 + $2,384.05 + $2,059.56 + $1,779.11 + $2,232.18
NPV = $2,168.02

Therefore, the net present value of this project is $2,168.02, and the best choice is B.

A Project Will Produce Cash Inflows of $3,200 a Year