What is the NPV of the project if first year savings are only $75,000 and the project is not sold?
A)$4545
B)$15,691
C)$15,619
D)$75,000

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to find the total present value of cash inflows and outflows. 
Initial investment = $500,000 
Cash inflows for five years: 
Year 1 savings = $75,000 
Year 2 savings = $125,000 
Year 3 savings = $150,000 
Year 4 savings = $175,000 
Year 5 savings = $200,000

Discount rate = 10%

Now we can calculate the present value of each cash inflow:

PV of Year 1 savings = $75,000 / (1 + 0.10)^1 = $68,182 
PV of Year 2 savings = $125,000 / (1 + 0.10)^2 = $102,479 
PV of Year 3 savings = $150,000 / (1 + 0.10)^3 = $115,742 
PV of Year 4 savings = $175,000 / (1 + 0.10)^4 = $126,903 
PV of Year 5 savings = $200,000 / (1 + 0.10)^5 = $129,591

Total PV of cash inflows = $68,182 + $102,479 + $115,742 + $126,903 + $129,591 = $542,897

Now, we can calculate the NPV:

NPV = Total PV of cash inflows - Initial investment 
NPV = $542,897 - $500,000 = $42,897

Therefore, the answer is B, $15,691, since the NPV is still positive despite the first year savings being lower than expected.

What Is the NPV of the Project If First Year