Question

Tappen Corp. is considering a capital investment that will cost $400,000 and is expected to generate cash flows of $100,000 per year for the next five years (a total of $500,000 of cash inflows). In working through the NPV analysis, Tappen should compare the $400,000 cash outflow to the present value of the cash inflows, calculated as...

A)	$100,000 multiplied by the appropriate present value factor.

B)	$100,000 divided by the appropriate present value factor.

C)	$500,000 multiplied by the appropriate present value factor.

D)	$500,000 divided by the appropriate present value factor.

Answer 1

The answer is option A) : $100,000 multiplied by appropriate present value factor.

Reason : In Net Present Value ( NPV ) analysis we compare the cash outflow with the present value of cash inflow and the present value of cash inflow is calculated as follows :

Present value of cash inflow = Cash inflow per year * Appropriate present value factor

So, in the given case cash inflow per year is $100,000 which we have to multiply by the appropriate present value factor to get the present value of cash inflow.