A firm invests $200 000 in machinery that yields net after-tax cash flows of $90 000 at the end of each of the next three years. The opportunity cost of capital is 12%. What is the net present value of the project (to the nearest thousand dollars)?
A) -$16 000
B) -$8000
C) $0
D) $8000
E) $16 000

Question

Quizplus · Accepted Answer

The net present value (NPV) of the project is calculated by discounting the future cash flows back to their present value and subtracting the initial investment. Using the formula for NPV: NPV = (Cash Flow / (1 + r)^t) - Initial Investment, where r is the discount rate (12% or 0.12) and t is the time period, we calculate the NPV as follows: NPV = ($90,000 / (1 + 0.12)^1) + ($90,000 / (1 + 0.12)^2) + ($90,000 / (1 + 0.12)^3) - $200,000 ≈ $80,357 + $71,748 + $64,061 - $200,000 ≈ $16,166, which rounds to $16,000 to the nearest thousand dollars.

A Firm Invests $200 000 in Machinery That Yields Net