Question

Adam Industries Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $350,000. The respective future cash inflows from its five-year project for years 1 through 5 are $75,000 each year. Apam expects an additional cash flow of $50,000 in the fifth year. The firm uses the net present value method and has a discount rate of 10%. Will Apam accept the project? Group of answer choices Apam accepts the project because it has

Answer 1

Apam Industries Inc. should accept the project as the net present value (NPV) is positive.

Step-by-step explanation:

To determine whether Adam Industries Inc. should accept the project, we need to calculate the net present value (NPV) of the cash flows. NPV is the sum of the present values of all cash inflows and outflows. In this case, the initial cost is $350,000, and the cash inflows are $75,000 per year for years 1-4 and $125,000 in year 5. Using a discount rate of 10%, we can calculate the present value of each cash flow and sum them up to find the NPV.

The present value of the initial cost is $350,000. The present value of the cash inflows for years 1-4 is $75,000 each year, which totals to $268,158. The present value of the additional cash flow in year 5 is $113,128.

Summing up the present values, we get $350,000 + $268,158 + $113,128 = $731,286. Since the NPV is positive, Apam should accept the project. It indicates that the project's expected return is higher than the cost of capital.