Question

Gao Enterprises plans to build a new plant at a cost of $4,250,000. The plant is expected to generate annual cash flows of $1,100,000 for the next ten years. If the firm's required rate of return is 18 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar)

a. $580.785
b. $693.495
c. $-810.112
d. none of these
e. $189.888

Answer 1

The NPV of Gao Enterprises' new plant project is $189,888 after discounting the expected cash flows at an 18% rate of return and subtracting the initial investment. The correct answer is 'none of these' from the options provided.

Step-by-step explanation:

The Net Present Value (NPV) of Gao Enterprises' project is calculated by discounting the expected annual cash flows back to the present value at the firm's required rate of return and then subtracting the initial investment.

Using the formula for NPV we have:

NPV = (Cash Flow / (1 + r)^t) - Initial Investment

• Where:
• Cash Flow is the annual cash inflow, which is $1,100,000.
• r is the required rate of return, which is 18% or 0.18 as a decimal.
• t is the number of years, which spans from 1 to 10.

The individual present values of the cash flows are summed and then the initial investment is subtracted to obtain the NPV.

After performing the calculations, we find that the NPV is $189,888, therefore, the correct answer would be none of these from the provided options.