Question

a company is considering investing in a project. The project will require a 10% rate return. The project will require $65,000 investment and provides the following returns:

year 1:   $20,000

year 2: $20,000

year 3: $20,000 year

4: $25,000

I)Given that the company needs to make at least 10% return on its project what is the projects NPV for the return on its investment?

A) $85,000

B) $20,000

C) Less than $2,000 but more than $1,000

D) less then $1,000

II)Whats the NPV contribution to the overall project of the 4th year ($25,000) return?

A) $19,072.38

B) $15,026.30

C) $25,000

D) $17,075.34

Answer 1

I) Answer:C) Less than $2,000 but more than $1,000

Explanation:

	Returns	x	Present value Factor @ 10 %	=	Present value
Year 1	$20,000	x	0.90909	=	$18,182
Year 2	$20,000	x	0.82645	=	$16,529
Year 3	$20,000	x	0.75131	=	$15,026
Year 4	$25,000	x	0.68301	=	$17,075
Present value of returns					$66,812
(Less): cost					($65,000)
NPV					$1,812

Thus, NPV is Less than $2,000 but more than $1,000

II) Answer: D)$17,075.34

Explanation:

	Returns	x	Present value Factor @ 10 %	=	Present value
Year 4	$25,000	x	0.68301	=	$17,075

Thus, NPV contribution to the overall project of the 4th year ($25,000) return is $17,075.34