Question

Bill plans to open a do-it-yourself dog bathing center in a storefront. The bathing equipment will cost $50,000. Bill expects the after-tax cash inflows to be $15,000 annually for 8 years, after which he plans to scrap the equipment and retire to the beaches of Jamaica.

17. Assume the required return is 10%. What is the project's NPV?

A) $887 B) $13,322 C) $22,759 D) $30,023.89 E) $80,023.89

Answer 1

The NPV is computed as shown below:

= Initial investment + Present value of future cash flows

Present value is computed as follows:

= Future value / (1 + r)ⁿ

So, the NPV is computed as follows:

= - $ 50,000 + $ 15,000 / 1.10¹ + $ 15,000 / 1.10² + $ 15,000 / 1.10³ + $ 15,000 / 1.10⁴ + $ 15,000 / 1.10⁵ + $ 15,000 / 1.10⁶ + $ 15,000 / 1.10⁷ + $ 15,000 / 1.10⁸

= $ 30,023.89 Approximately

So, the correct answer is option D.

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