Question

The Whitton Company has an opportunity to buy a computer now for $25,000 that will yield...

The Whitton Company has an opportunity to buy a computer now for $25,000 that will yield annual net cash inflows of $10,000 for the next three years, after which its resale value would be zero. Whitton's cost of capital is 16%.

What is the net present value of the investment for the computer?

Select one:
a. $2,540
b. $(5,000)
c. $(2,540)
d. $22,459
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Homework Answers

Answer #1

Net present value is the difference between present value of cash inflows and present value of cash outflows.

So, if the value comes out to be positive this means the investment is favourable. But if the answer is a negative value, then investment shall not be made as it reflects that the Outflow is more than the inflow.

So here in the case, the answer is option C $(2540)

The excel easily allows this function to calculate.

Here, Npv function will calculate and give you the net present value of all the inflows (10,000 for 3 years) and then 25,000 has been subtracted as it is an outflow (i have already used -(negative) in 25,000 to denote outflow hence while calculating the final answer i have added this amount

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