Question

"Our company is evaluating a project with the projected future annual cash flows shown as follows and an appropriate cost of capital of 10.0% : Period 0: $-2,500.; Period 1: $-3,000.; Period 2: $50.; Period 3: $3,500.; Period 4: $2,200.; Period 5: $200.; Compute the NPV statistic for the project and whether the company should accept or reject this project."

($703) / Accept

($930) / Reject

($930) / Accept

($703) / Reject

"($1,654) / Accept"

"($1,654) / Reject"

Insufficient data provided to calculate this statistic

Answer 1

Calculation of NPV of project:

NPV = Sum of discounted cash inflows - Initial investment

Given,

Initial investment = 2500$

Calculation of sum of discounted cash inflows:

Year Cash flows($) Discount factor@10% Discounted cash inflows

1 -3000 0.909 -2727

2 50 0.826 41.3

3 3500 0.751 2628.5

4 2200 0.683 1502.6

5 200 0.621 124.2

Sum of discounted cash inflows = -2727+ 41.3 +2628.5+1502.6 + 124.2

= 1569.6$ or 1570$

NPV = 1570 - 2500

= -930

NPV is negative, therfore reject this project

Option 2 is correct.