A company is considering an iron ore extraction project that requires an initial

Question

A company is considering an iron ore extraction project that requires an initial investment of $518,000 and will yield annual cash flows of $158,000 for 4 years. The companies discount rate is 9%. What is the NPV of the project? Resent value of annuity of $1:

8% 9% 10%

1 0.926 0.917 0.909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

4 3.312 3.24 3.17

5 3.993 3.89 3.791

6 4.623 4.486 4.355

7 5.206 5.033 4.868

8 5.747 5.535 5.335

9 6.247 5.995 5.759

10 6.71 6.418 6.145

A) Positive $103,600

B) Positive $6,080

C) Negative $103,600

D) Negative $6,080

Explanation / Answer

Year Cash inflows Annuity value @9% Present value of cash flows

1 to 4 158000 3.24 511920

Initial investment 518000

NPV (6080)

Answer: D) Negative 6080

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