Question

Would you accept a project which is expected to pay $10,000 a year for seven years if the initial investment is $40,000 and your required return is 15%?

a. Yes; the NPV is $4,238

b. Yes; the NPV is $1,446

c. Yes; the NPV is $1,604

d. No; the NPV is -$2,783

e. No; the NPV is -$1,369

Answer 1

Answer is “Yes; the NPV is $1,604”

Initial Investment = $40,000
Annual Cash Inflows = $10,000
Life of Project = 7 years
Required Return = 15%

Present Value of Cash Inflows = $10,000/1.15 + $10,000/1.15^2 + … + $10,000/1.15^6 + $10,000/1.15^7
Present Value of Cash Inflows = $10,000 * (1 - (1/1.15)^7) / 0.15
Present Value of Cash Inflows = $10,000 * 4.1604
Present Value of Cash Inflows = $41,604

Net Present Value = Present Value of Cash Inflows - Initial Investment
Net Present Value = $41,604 - $40,000
Net Present Value = $1,604

You should accept this project as its NPV is positive.