The BobIU Computer Graphics Co. has just produced a new multimedia graphics chip which will cost $6,000,000 this year to put into production. They anticipate net cash flows of $3 million next year, $2million, $1 million, $.5 million, $.25 million and then $0 over each of the following years. The two owners require a 15% return on their investment. The value of this investment to the firm is:
A) $750,000.
B) -$811,329.97.
C) $556,462.71.
D) $652,173.91.
E) -$371,782.85.

Question

Quizplus · Accepted Answer

The value of the investment is calculated using the Net Present Value (NPV) method. The NPV of the cash flows, discounted at 15%, is negative, specifically -$811,329.97.