Asked by Mlebinge Endani on Jul 07, 2024
Verified
You are considering a project with an initial outlay of $12 million followed by 4 years of $4 million. What is the NPV if the discount rate is 8%?
A) $6,204,400
B) $1,248,400
C) $13,248,400
D) $ 18,204,400
NPV
Net Present Value, a method used in capital budgeting to evaluate the profitability of an investment by calculating the present value of expected cash flows minus the initial cost.
Discount Rate
The interest rate used in discounted cash flow analysis to determine the present value of future cash flows.
- Acquire an understanding of the Net Present Value (NPV) concept and its use in scrutinizing projects.
Verified Answer
VB
Victoria BranchJul 14, 2024
Final Answer :
B
Explanation :
To calculate the NPV, we need to find the present value of cash flows and then subtract the initial investment.
PV of cash flows =
($4 million / (1+0.08)^1) + ($4 million / (1+0.08)^2) + ($4 million / (1+0.08)^3) + ($4 million / (1+0.08)^4) = $13,248,400
NPV = PV of cash flows - initial investment = $13,248,400 - $12 million = $1,248,400
Therefore, the best choice is B.
PV of cash flows =
($4 million / (1+0.08)^1) + ($4 million / (1+0.08)^2) + ($4 million / (1+0.08)^3) + ($4 million / (1+0.08)^4) = $13,248,400
NPV = PV of cash flows - initial investment = $13,248,400 - $12 million = $1,248,400
Therefore, the best choice is B.
Learning Objectives
- Acquire an understanding of the Net Present Value (NPV) concept and its use in scrutinizing projects.
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