Project Zeta is expected to produce after-tax cash flows of $30 million in year 1, $40 million in year 2, and $50 million in year 3. If the company uses a 12% required rate of return, what is the most it can invest in this project and break even with respect to NPV?
A) $69.03 million
B) $94.26 million
C) $1,11 million
D) $120 million

Question

Quizplus · Accepted Answer

To find the most that can be invested while breaking even with respect to NPV, we need to find the present value of the expected cash flows, and subtract that amount from the initial investment.

Present Value of Year 1 Cash Flow: $30 million / (1+0.12)^1 = $26.79 million 
Present Value of Year 2 Cash Flow: $40 million / (1+0.12)^2 = $30.62 million 
Present Value of Year 3 Cash Flow: $50 million / (1+0.12)^3 = $32.94 million

Total Present Value of Cash Flows: $26.79 million + $30.62 million + $32.94 million = $90.35 million

To break even with respect to NPV, the initial investment cannot exceed $90.35 million. Therefore, the most that can be invested is $94.26 million (rounded to two decimal places).

Therefore, the correct answer is B.

Project Zeta Is Expected to Produce After-Tax Cash Flows of $30