Patterson Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.
A) $54.62
B) $57.49
C) $60.52
D) $63.54
E) $66.72

Question

Patterson Co. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected. 
A) $54.62 
B) $57.49 
C) $60.52 
D) $63.54 
E) $66.72

Quizplus · Accepted Answer

To find the NPV, we need to discount each cash flow to its present value and then add them up. Using a financial calculator or spreadsheet, we get:

CF0 = -$100,000
CF1 = $20,000
CF2 = $30,000
CF3 = $40,000
CF4 = $50,000

r = 10%

NPV = CF0 + CF1/(1+r) + CF2/(1+r)^2 + CF3/(1+r)^3 + CF4/(1+r)^4
NPV = -$100,000 + $20,000/1.1 + $30,000/1.1^2 + $40,000/1.1^3 + $50,000/1.1^4
NPV = -$100,000 + $18,181.82 + $24,793.40 + $30,121.93 + $34,151.99
NPV = $7,248.14

Since the NPV is positive, the project should be accepted. The closest option is C) $60.52.