Question

A project requires an initial investment of $1,500,000 and will return $420,000 each year for six years. Factors: Present Value of an Annuity (r = 10%) Year 1 0.9091 Year 2 1.7355 Year 3 2.4869 Year 4 3.1699 Year 5 3.7908 Year 6 4.3553 Use this data to answer questions 15 and 16: If taxes are ignored and the required rate of return is 10%, what is the project's net present value (rounded to the nearest dollar)? (5pts) a. $1,262,910 b. $1,020,000 c. $329,226 d. $344,409 e. None of the answer choices is correct. 16) Using the net present (NPV) to evaluate this proposal, the company should: (5pts) a. Reject the proposal since the NPV is ($329,226). b. Invest in the proposal since the NPV is $1,020,000. c. Invest in the proposal since the NPV is $3,329,226. d. Invest in the proposal since the NPV is $329,226. e. None of the answer choices is correct.

Answer 1

• All working forms part of the answer
• Answer 15

Net present value = Present values of future cash flows – Initial Investments

= (Annual Cash flows x Present Value of Annuity for 6^th year at 10%) – Initial Investment

= ($ 420,000 x 4.3553) - $ 1,500,000

= $ 1,829,226 - $ 1,500,000

= $ 329,226 = Net present Value

Correct Answer = Option ‘C’ $ 329,226

• Answer 16

Generally, if NPV is Positive the project should be accepted.

In Answer 15, NPV computed is $ 329,226 and it is POSITIVE (which means that Future discounted cash flows are MORE than initial investment).

Hence, correct Answer = Option ‘D’ Invest in the proposal since the NPV is $ 329,226