Question

Living Colour Co. has a project available with the following cash flows:

Year Cash Flow 0− $34,590
Year 1- 8,060

Year 2- 9,690

Year 3- 13,770

Year 4- 15,730

Year 5- 10,520

If the required return for the project is 8.2 percent, what is the project's NPV?

A.) $10,577.24

B.) $11,458.68

C.) $12,088.28

D.) $3,483.43

E.) $23,180.00

Answer 1

SOLUTION:

The values of Living Colour Co. provided in the question are as follows:

Year Cash Flow 0− $34,590
Year 1- 8,060

Year 2- 9,690

Year 3- 13,770

Year 4- 15,730

Year 5- 10,520

Required return for the project = 8.2 percent or 0.082

Project’s (NPV) Net Present Value =?

CALCULATION OF NET PRESENT VALUE OF PROJECT OF LIVING COLOUR CO WHEN DISCOUNT RATE IS 8.2 %
Year	Inflow (a)	Discounting Factor (b ) = (1/1+r)^n	P.V. (c ) = (axb)
1	$8,060	0.9242	$7,449.05
2	$9,690	0.8542	$8,277.20
3	$13,770	0.7894	$10,870.04
4	$15,730	0.7296	$11,476.61
5	$10,520	0.6743	$7,093.64
PRESENT VALUE OF INFLOW			$45,166.53
NET PRESENT VALUE = PRESENT VALUE OF CASH INFLOW- PRESENT VALUE OF CASH OUTFLOW
NET PRESENT VALUE = $45,166.53 - $34,590
NET PRESENT VALUE =$10,576.53
OPTION 'A' WILL BE CORRECT