Question

Richey, Inc. has a project with expected cash flows of -$30,000, $21,750, $18,500, and $12,500 for years 0 to 3, respectively. What is the NPV if the opportunity cost of capital is 13%? Should the project be accepted or rejected?

$10,011.18; reject

$7,264.95; reject

$9,616.93; accept

$12,399.13; accept

$15,684.22; reject

Answer 1

Net Present Value (NPV) of the Project

Year	Annual Cash Flow ($)	Present Value factor at 13%	Present Value of Cash Flow ($)
1	21,750	0.884956	19,247.79
2	18,500	0.783147	14,488.21
3	12,500	0.693050	8,663.13
TOTAL			42,399.13

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $42,399.13 - $30,000

= $12,399.13

DECISION

YES”. Richey, Inc should accept the project, since the Net Present Value of the Project is Positive $12,399.13. Hence, the right answer choice will be $12,399.13; accept.

NOTE

The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.