Final answer:
The question asks for the calculation of NPV for a project's cash flows, given a required return rate. This involves discounting each future cash flow to its present value using the required return rate and adding them up, then subtracting the initial investment to find the NPV.
Step-by-step explanation:
The question involves calculating the Net Present Value (NPV) of cash flows for a project at Living Colour Company. Since the required return for the project is 8%, we have to discount each of the cash flows back to their present value at this rate. To find the NPV, we sum the present values of all future cash flows and subtract the initial investment.
To calculate the present value of each cash flow, the formula used is:
PV = Cash Flow / (1 + r)t
Where PV is the present value, r is the required return (8% in this case), and t is the year of the cash flow.
Here's an example calculation for Year 1:
PV = $8,000 / (1 + 0.08)1 = $7,407.41
You would perform a similar calculation for each cash flow from Year 1 to Year 5 and add them together. After calculating the present values, the NPV is found by summing these values and subtracting the initial investment (Year 0 cash flow).
The correct NPV for this project, given the cash flows and the required return of 8%, would be one of the provided options (A, B, C, or D) based on these calculations.