Question

Bramble recently invested in a project with a 3-year life span. The net present value was $8400 and annual cash inflows were $26000 for year 1; $28000 for year 2; and $30000 for year 3. The initial investment for the project, assuming a 15% required rate of return, was:

1) $30,000
2) $25,000
3) $20,000
4) $15,000

Answer 1

To calculate the initial investment for the project with a 3-year life span and given cash inflows, we can use the present value formula. Substituting the values provided, the initial investment is approximately $22,608.62. The closest option to that value is 3) $20,000.

Step-by-step explanation:

To calculate the initial investment for the project, we need to compute the present value of the annual cash inflows. We can use the formula:

PV = CF1/(1+r)^1 + CF2/(1+r)^2 + CF3/(1+r)^3

Where PV is the present value, CF is the cash inflow for each period, and r is the required rate of return.

Substituting the given values, we have:

PV = 26000/(1+0.15)^1 + 28000/(1+0.15)^2 + 30000/(1+0.15)^3

PV ≈ $22,608.62

Therefore, the initial investment for the project is $22,608.62, which is closest to option 3) $20,000.