Cloud Inc is considering a project with the following cash flows: Initial outlay = $750,000
Incremental after-tax cash flows from operations for years 1-4 = $250,000 per year
Calculate the NPV of this project if the company's discount rate is 12%.
A)$9337
B)$7758
C)$4337
D)$2534

Question

Quizplus · Accepted Answer

The NPV (Net Present Value) can be calculated using the formula: NPV = $\sum \frac{CF_t}{(1+r)^t} - Initial\ Outlay$, where $CF_t$ is the cash flow in period $t$, $r$ is the discount rate, and $t$ is the time period. For this project, the cash flows are $250,000 for years 1-4, the discount rate is 12% (0.12), and the initial outlay is $750,000.NPV = $\frac{250,000}{(1+0.12)^1} + \frac{250,000}{(1+0.12)^2} + \frac{250,000}{(1+0.12)^3} + \frac{250,000}{(1+0.12)^4} - 750,000$NPV = $\frac{250,000}{1.12} + \frac{250,000}{1.2544} + \frac{250,000}{1.404928} + \frac{250,000}{1.57351936} - 750,000$NPV = $223,214.29 + 199,290.78 + 177,915.73 + 158,916.21 - 750,000$NPV = $759,336.99 - 750,000$NPV = $9,337$Therefore, the correct choice is A, with the NPV of the project being $9,337.

Cloud Inc Is Considering a Project with the Following Cash