Asked by elizabeth odegard on Jun 27, 2024
Verified
What is the net present value of a project that requires an initial investment of $76,000 and produces net cash flows of $22,000 per year for 7 years? Assume the discount rate is 15 percent.
A) $91,520
B) $15,520
C) $78,000
D) $167,474
Net Present Value
The difference between the present value of cash inflows and the present value of cash outflows over a period of time.
Discount Rate
The interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.
Net Cash Flows
The difference between a company's total cash inflows and total cash outflows over a specific period, highlighting its financial health.
- Conduct an analysis and provide an explanation of Net Present Value (NPV) for multiple projects.
Verified Answer
EO
Elora O'NeilJul 02, 2024
Final Answer :
B
Explanation :
The net present value (NPV) of a project is calculated by discounting the future cash flows back to their present value and then subtracting the initial investment. Using the formula for NPV and a discount rate of 15%, the calculation for this project would be: NPV = ($22,000 / 1.15^1) + ($22,000 / 1.15^2) + ... + ($22,000 / 1.15^7) - $76,000. This calculation results in an NPV of approximately $15,520, making option B the correct answer.
Learning Objectives
- Conduct an analysis and provide an explanation of Net Present Value (NPV) for multiple projects.