Question

# A firm is considering a 4-year project with an initial investment of \$400,000. During the first...

A firm is considering a 4-year project with an initial investment of \$400,000. During the first year of operation, the project will bring an incremental cash flow of \$100,000. The firm expects that the cash flow will grow at 15% annually. The project will be terminated after the fourth year of operation. If the required rate of return for this project is 17%, should the firm accept the project based on NPV criterion?

Indifferent, because the NPV is \$0.

No, because the NPV is -\$66,790

Yes, because the NPV is \$99,340.

No, because the NPV is -\$125,680

Yes, because the NPV is \$35,370

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:

= - \$ 400,000 + \$ 100,000 / 1.17 + (\$ 100,000 x 1.15) / 1.172 + (\$ 100,000 x 1.152) / 1.173 + (\$ 100,000 x 1.153) / 1.174

= - \$ 400,000 + \$ 100,000 / 1.17 + \$ 115,000 / 1.172 + \$ 132,250 / 1.173 + \$ 152,087.5 / 1.174

= - \$ 66,790 Approximately

So, the correct answer is option of No, because the NPV is -\$66,790

Feel free to ask in case of any query relating to this question

#### Earn Coins

Coins can be redeemed for fabulous gifts.