Question

A company is considering a 4-year project. The project would require a $400,000 intial cash outflow at the beginning and is expected to generate cash inflows in the amount of $150,000 at the end of each of the 4 years. What is the NPV for the project if the company requires a 11.25% return on nvestment? Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas and the $ sign in your response. For example, an answer of $1,000.50 should be entered as 1000.50 .

Answer 1

The NPV of the project is calculated by discounting the expected cash inflows at the company's required return of 11.25%. After performing the calculations, the NPV is found to be $62,926.22. A positive NPV indicates that the project could be a good investment.

Step-by-step explanation:

To calculate the Net Present Value (NPV) of the company's project, we will discount the expected cash inflows at the company's required return on investment of 11.25% and subtract the initial cash outflow. The cash inflows are $150,000 at the end of each of the 4 years. The formula to calculate the present value (PV) of each cash inflow is PV = Cash Inflow / (1 + r)^t, where r is the discount rate and t is the time period.

1. Year 1: PV = $150,000 / (1 + 0.1125)^1
2. Year 2: PV = $150,000 / (1 + 0.1125)^2
3. Year 3: PV = $150,000 / (1 + 0.1125)^3
4. Year 4: PV = $150,000 / (1 + 0.1125)^4

After calculating each of these, we will sum the PVs to find the total present value of the inflows and then subtract the initial investment of $400,000.

The calculation for the NPV would be as follows:

• Year 1 PV = $150,000 / 1.1125 = $134,831.86
• Year 2 PV = $150,000 / (1.1125)^2 = $121,222.57
• Year 3 PV = $150,000 / (1.1125)^3 = $108,942.12
• Year 4 PV = $150,000 / (1.1125)^4 = $97,929.67

Add up the present value for each year:
NPV = $134,831.86 + $121,222.57 + $108,942.12 + $97,929.67 - $400,000

NPV = $462,926.22 - $400,000 = $62,926.22

Therefore, the NPV of the project is $62,926.22. With a positive NPV, this suggests that the project is expected to generate a return greater than the company's required rate of 11.25%, and it could be considered as a good investment.