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A company is planning a new project. This will involve the purchase of some new equipment costing $450,000. The project will last for four years. The cash inflows forecast as listed below: Year One: 200,000 Year Two: 225,000 Year Three: 275,000 Year Four: 200,000 Assume the appropriate discount rate for this project is 16%. The NPV of this project is closest to: Question 1Answer A. 150,000 B. 170,000 C. 190,000 D. 210,000

Question

A company is planning a new project. This will involve the purchase of some new equipment costing $450,000. The project will last for four years. The cash inflows forecast as listed below:

Year One: 200,000

Year Two: 225,000

Year Three: 275,000

Year Four: 200,000

Assume the appropriate discount rate for this project is 16%. The NPV of this project is closest to:

Question 1Answer

A. 150,000

B. 170,000

C. 190,000

D. 210,000

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Solution

To calculate the Net Present Value (NPV) of the project, we need to discount the cash inflows for each year by the discount rate and then subtract the initial investment.

Here's how to do it:

  1. Calculate the present value (PV) of each year's cash inflow by using the formula: PV = Cash inflow / (1 + r)^n, where r is the discount rate and n is the year.

    Year One: PV = 200,000 / (1 + 0.16)^1 = 172,413.79YearTwo:PV=225,000/(1+0.16)2=172,413.79 Year Two: PV = 225,000 / (1 + 0.16)^2 = 166,502.87 Year Three: PV = 275,000 / (1 + 0.16)^3 = 181,347.15YearFour:PV=200,000/(1+0.16)4=181,347.15 Year Four: PV = 200,000 / (1 + 0.16)^4 = 118,248.17

  2. Add up all the present values of cash inflows: 172,413.79+172,413.79 + 166,502.87 + 181,347.15+181,347.15 + 118,248.17 = $638,511.98

  3. Subtract the initial investment from the total present value of cash inflows: 638,511.98−638,511.98 - 450,000 = $188,511.98

So, the NPV of the project is closest to $190,000. Therefore, the correct answer is C. 190,000.

This problem has been solved

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