Question

Use the following table,

Present Value of an Annuity of 1

Period

8%

9%

10%

1	.926	.917	.909
2	1.783	1.759	1.736
3	2.577	2.531	2.487

Your potential project has a required rate of return of 9%. The project costs $350,000 and is expected to generate cash inflows of $140,000 at the end of each year for three years. The net present value of this project is

	A.	$35,436.
	B.	$4,340.
	C.	$354,340.
	D.	$70,000.

Answer 1

Initial investment = $350,000

Annual cash inflow = $140,000

Interest rate (i) = 9%

Time period (n) = 3 years

Present value annuity factor (9%,3) = 2.531

Present value of cash inflows = Annual cash inflow x Present value annuity factor (9%,3)

= 140,000 x 2.531

= $354,340

Net present value = Present value of cash inflows- Initial investment

= 354,340-350,000

= $4,340

The net present value of this project is $4,340

Correct option is B.

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