Asked by Alyssa Noriega on Jul 17, 2024
Verified
T-Bone Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows is $141,000. Should the company invest in this project?
A) yes, because net present value is $9,000
B) yes, because net present value is $(9,000)
C) no, because net present value is $9,000
D) no, because net present value is $(9,000)
Net Present Value
A financial metric that calculates the difference between the present value of cash inflows and the present value of cash outflows over a period of time.
Present Value
The contemporary valuation of foreseeable future earnings or sequences of cash payments, taking into account a specified interest rate.
- Calculate and interpret the net present value (NPV) of an investment and utilize it to make investment decisions.
Verified Answer
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Sahil ChawlaJul 22, 2024
Final Answer :
D
Explanation :
The net present value is calculated by subtracting the present value of the investment from the initial investment. In this case, the net present value is negative ($150,000 - $141,000 = -$9,000), indicating that the project will not generate sufficient returns to cover the cost of the investment. Therefore, T-Bone Company should not invest in this project.
Learning Objectives
- Calculate and interpret the net present value (NPV) of an investment and utilize it to make investment decisions.