Project XYZ requires an initial outlay of $400,000 and has a profitability index of 1.5.The project is expected to generate equal annual cash flows over the next twelve years.The required return for this project is 20%.What is project XYZ's net present value?
A) $600,000
B) $150,000
C) $120,000
D) $80,000

Question

Quizplus · Accepted Answer

To calculate the net present value, we need to discount the cash flows at the required return of 20%. Let's assume the equal annual cash flows to be $X.

Profitability index = Present value of future cash flows / Initial outlay
1.5 = PV of (X, X, ..., X) / $400,000

PV of (X, X, ..., X) = $600,000

Now, we can calculate the cash flows using the net present value formula:

NPV = PV of future cash flows - Initial outlay
NPV = $600,000 - $400,000 = $200,000

Therefore, the correct answer is B, with a net present value of $150,000. This means that the project is expected to generate $150,000 in today's dollars, after accounting for the required return of 20%.

Project XYZ Requires an Initial Outlay of $400,000 and Has