Question

Gao Enterprises plans to build a new plant at a cost of $3,250,000. The plant is expected to generate annual cash flows of $1,225,000 for the next five years. If the firm's required rate of return is 15 percent, what is the NPV of this project? (Do not round intermediate calculations.)

a)$580,785
b)$4,106,390
c)$2,875,000
d)$856,390

Answer 1

To calculate the NPV of the project, we need to discount the cash flows to the present value and subtract the initial cost of the plant. The NPV for this project is $4,106,390.

Step-by-step explanation:

To calculate the NPV of the project, we need to discount the cash flows to the present value and subtract the initial cost of the plant. The formula to calculate NPV is:

NPV = -Initial Cost + (Cash Flow / (1+r)^n)

Where r is the required rate of return and n is the number of years. Plugging in the values given:

NPV = -3,250,000 + (1,225,000 / (1+0.15)^1) + (1,225,000 / (1+0.15)^2) + (1,225,000 / (1+0.15)^3) + (1,225,000 / (1+0.15)^4) + (1,225,000 / (1+0.15)^5)

Simplifying this equation gives us an NPV of $4,106,390. Therefore, the correct answer is (b) $4,106,390.