Question

Osler Company is considering an investment with the following data: Initial cost $200,000 Annual net cash inflows $25,000 Expected life 10 years Salvage value none Depreciation will be taken on a straight-line basis over the expected life of the investment The company requires a minimum rate of return of 4%. What is the net present value of the investment? Period 1 2 3 4 5 6 7 8 9 10 4% 0.962 1.886 2.775 3.630 4.452 5.242 6.002 6.773 7.435 8.111 a.($81,830) b.$118,170 c.$202,775 d.$2,775

Answer 1

d.$2,775

Step-by-step explanation:

The computation of the net present value is shown below:

= Present value of all yearly cash inflows after applying discount factor - initial investment

where,

The Present value would be

= Annual net cash inflows × PVIFA at 4% for 10 years

= $25,000 × 8.111

= $202,775

And, the initial investment is $200,000

Now put these values to the above formula

So, the value would equal to

= $202,775 - $200,000

= $2,775