A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is ________.
A) -$1,000
B) $0
C) $1,000
D) $1.25

Question

Quizplus · Accepted Answer

The net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. In this case, the initial investment of $5,000 is a cash outflow, while the present value of cash flows is $4,000. If the required rate of return is greater than the discount rate used to determine the present value of the cash flows, then the NPV will be negative. Therefore, the NPV calculation would be:

NPV = -$5,000 + $4,000 = -$1,000

Thus, the best choice is A) -$1,000.

A Firm Is Evaluating an Investment Proposal Which Has an Initial