Question

Charles Henri is considering investing $37,800 in a project that is expected to provide him with cash inflows of $11,600 at the end of each of the first two years and $20,000 at the end of the third year. What is the project’s NPV at a discount rate of 0 percent? At 5 percent? At 10 percent?

$0; $1,045.91; –$2,641.47

$4,468.39; $38.29; –$2,784.08

$5,400; $1,045.91; –$2,641.47

$5,400; $417.92; –$3,406.10

$4,468.39; $38.29; –$2,641.47

Answer 1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

At 0%:

Present value of inflows=(11600+11600+20000)=$43200

NPV=Present value of inflows-Present value of outflows

=(43200-37800)=$5400

At 5%:

Present value of inflows=(11600/1.05+11600/1.05^2+20000/1.05^3)=$38845.91

NPV=Present value of inflows-Present value of outflows

=(38845.91-37800)=$1045.91

At 10%:

Present value of inflows=(11600/1.1+11600/1.1^2+20000/1.1^3)=$35158.53

NPV=Present value of inflows-Present value of outflows

=(35158.53-37800)=$(2641.47)(Approx)(Negative).

Hence the correct option is C.