Question

The following data on a proposed investment project have been provided:

Cost of equipment: $50,000
Working capital required: $30,000
Salvage value:$0
Annual cash inflows from proj: $20,000
Required rate of return: 20%
Life of project: 8years

The working capital would be released for use elsewhere at the end of the project. The Net present value of the project is closest to:

A)$3,730
B)$0
C)$32,450
D)$88,370

Answer 1

The net present value of the project is closest to $76,275.

Step-by-step explanation:

The net present value (NPV) of the project can be calculated by subtracting the initial investment from the present value of the cash inflows. To calculate the NPV, we need to discount the cash inflows using the required rate of return, which is 20% in this case.

First, we calculate the present value factor (PVF) for each year. PVF is calculated as (1 + r)^(-t), where r is the required rate of return and t is the year. Using the formula, we calculate PVFs for years 1 to 8: 0.833, 0.694, 0.579, 0.482, 0.402, 0.335, 0.279, and 0.233.

Next, we multiply the annual cash inflows by the respective PVFs and sum them up: (20,000 * 0.833) + (20,000 * 0.694) + (20,000 * 0.579) + (20,000 * 0.482) + (20,000 * 0.402) + (20,000 * 0.335) + (20,000 * 0.279) + (20,000 * 0.233) = $156,275.

Finally, we subtract the initial investment ($50,000 for equipment + $30,000 for working capital) from the calculated present value to get the NPV: $156,275 - $80,000 = $76,275. Therefore, the net present value of the project is closest to $76,275.