Kampgrounds Inc.is considering purchasing a parcel of wilderness land near a popular historic site.Although this land will cost Kampgrounds $400,000 today,by renting out wilderness campsites on this land,Kampgrounds expects to make $35,000 at the end of every year indefinitely.If the appropriate discount rate is 8%,then the NPV of this new wilderness campsite is closest to:
A)-$50,000.
B)-$37,500.
C)$37,500.
D)$50,000.

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount the future cash flows to their present value. Using the perpetuity formula, we can find the present value of the expected annual cash flow of $35,000:

Present value = Annual cash flow / Discount rate
Present value = $35,000 / 0.08
Present value = $437,500

Now we need to subtract the initial cost of $400,000 to find the NPV:

NPV = Present value - Initial cost
NPV = $437,500 - $400,000
NPV = $37,500

Therefore, the NPV of this new wilderness campsite is closest to $37,500. So, the best choice is C.