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Brunette Company is contemplating investing in a new piece of manufacturing machinery. The amount to be...

Brunette Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $180,000. The present value of the future cash flows generated by the project is $163,000. Should they invest in this project?

a.no, because net present value is +$17,000

b.yes, because the rate of return on the project is equal to the desired rate of return used to calculate the present value of the future cash flows

c.no, because the rate of return on the project is less than the desired rate of return used to calculate the present value of the future cash flows

d.yes, because the rate of return on the project exceeds the desired rate of return used to calculate the present value of the future cash flows

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Answer #1

ANSWER:

Net present value = Present value of cash inflow-Present value of cash outflow

= 163000-180000

Net present value = -17000

So correct option (c) = no, because the rate of return on the project is less than the desired rate of return used to calculate the present value of the future cash flows.

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