A project will produce cash inflows of $ 1 , 750 a year for four years. The proj
ID: 2733285 • Letter: A
Question
A project will produce cash inflows of $ 1 , 750 a year for four years. The project initially costs $ 10,600 to get started. In year five, the project will be closed and as a result will produce a cash inflow of $ 8,500. What is the net present value of this project if the required rate of return is 13 percent?
Year
Cash Flow
PVIF (13% , n)
Present Value
0
(10,600)
1 .oooo
-10,600.00
1
1,750
0.8850
1,548.75
2
1,750
0.7831
1 ,370.43
3
1,750
0.6931
1,212.93
4
1,750
0.6133
1 ,073.28
5
8,500
0.5428
4,613.80
NPV
-780.83
Year
Cash Flow
PVIF (13% , n)
Present Value
0
(10,600)
1 .oooo
-10,600.00
1
1,750
0.8850
1,548.75
2
1,750
0.7831
1 ,370.43
3
1,750
0.6931
1,212.93
4
1,750
0.6133
1 ,073.28
5
8,500
0.5428
4,613.80
NPV
-780.83
Explanation / Answer
The Net present value of the project is calculated as follows : -
NPV = -$ 10,600 + $ 1,750 / ( 1+0.13)1 + $ 1,750 / ( 1+0.13)2 + $ 1,750 / ( 1+0.13)3 +$ 1,750 / ( 1+0.13)4 + $ 8,500 / (1+0.13)5
NPV = -$ 781 . 21
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