Question

You are considering the investment project summarized by the cash flows and timeline below. If the discount rate is 12%, what is the net present value of this project? Would you accept or reject the project? Year 0: cash outflow (cost) of $5,000 Year 1: cash inflow of $2,000 Year 2: cash inflow of $1,050 Year

Answer 1

The net present value (NPV) of the project is -$2,376.56. The project should be rejected.

Step-by-step explanation:

The net present value (NPV) of this investment project can be calculated by discounting the cash flows to their present values and subtracting the initial cost. Let's calculate the NPV:

Year 0: Cash outflow = -$5,000

Year 1: Cash inflow = $2,000

Year 2: Cash inflow = $1,050

Now, discount each cash flow to its present value using the discount rate of 12%:

Present value of Year 0 cash outflow = -$5,000

Present value of Year 1 cash inflow = $2,000 / (1 + 0.12) = $1,785.71

Present value of Year 2 cash inflow = $1,050 / (1 + 0.12)^2 = $837.73

Calculate the total present value by adding the present values of all cash flows: PV = -$5,000 + $1,785.71 + $837.73 = -$2,376.56

The net present value (NPV) is -$2,376.56. Since NPV is negative, it means that the project's estimated value is less than the initial cost. Therefore, it is recommended to reject the project.