Sorenson Stores is considering a project that has the following cash flows: $\begin{array}{ll}
\text { Year } & \text { Cash Flow } \
0 & \mathrm{CF} 0=? \
1 & \$ 2,000 \
2 & 3,000 \
3 & 3,000 \
4 & 1,500
\end{array}$ The project has a payback of 2.5 years,and the firm's cost of capital is 12%.What is the project's NPV?
A)$577.68
B)$765.91
C)$1,049.80
D)$2,761.32

Question

Sorenson Stores is considering a project that has the following cash flows:​​​ $\begin{array}{ll}
\text { Year } & \text { Cash Flow } \
0 & \mathrm{CF} 0=? \
1 & \$ 2,000 \
2 & 3,000 \
3 & 3,000 \
4 & 1,500
\end{array}$ ​The project has a payback of 2.5 years,and the firm's cost of capital is 12%.What is the project's NPV?
A)$577.68
B)$765.91
C)$1,049.80
D)$2,761.32

Quizplus · Accepted Answer

The project's NPV can be calculated using the formula for NPV, which is the sum of the present value of each cash flow, including the initial investment (which is typically a negative number because it represents an outflow). Given the payback period is 2.5 years, we can infer the initial investment based on the cash flows and the payback period. However, to calculate NPV, we specifically need to discount each future cash flow back to its present value using the given cost of capital (12%) and then sum those values. The correct NPV, based on the calculation with the provided cash flows and the cost of capital, matches option B, $765.91. This indicates that after accounting for the time value of money at a 12% discount rate, the project is expected to create a net value of $765.91.