Question

An investment project involves an immediate outlay of $8 million. The net cash flows received at the end of years 1, 2, and 3 will be $3 million, $4 million, and $2 million. A 10% discount rate is applicable so that the present value factors for years 1, 2, and 3 are 0.9091, 0.8264, and 0.7513. The NPV of the investment will be: (a) (b) (c) (d) $1 million $9 million $0.46 million $7.54 million

Answer 1

(c) 0.46 million

Explanation:

As provided immediate cash outlay = $8 million.

This will represent cash outflow at period 0, as it is made immediately, no time period has lapsed.

Cash inflows as provided and the respective present value factor are:

Year Cash Inflow Factor Discounted Value

1 $3 million 0.9091 $2,727,300

2 $4 million 0.8264 $3,305,600

3 $2 million 0.7513 $1,502,600

Total present value of cash inflow = $7,535,500

Therefore, net present value = $7,535,500 - $8,000,000 = - $464,500

That is - 0.46 million

Correct option is

(c) 0.46 million