Question

Johnson Entertainment Systems is setting up to manufacture a new line of video game consoles. The cost of the manufacturing equipment is $1,750,000. Expected cash flows over the next four years are $725,000, $850,000, $1,200,000, and $1,500,000. Given the company's required rate of return of 15 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)

A) $1,169,806
B) $2,919,806
C) $4,669,806
D) $3,122, 607

Answer 1

The NPV of the project is $4,669,806.

Step-by-step explanation:

To calculate the Net Present Value (NPV) of the project, we need to discount the expected cash flows to their present values and subtract the initial investment cost. The formula for NPV is:

NPV = CF1/(1+r) + CF2/(1+r)^2 + CF3/(1+r)^3 + CF4/(1+r)^4 - Initial Investment

Where CF1, CF2, CF3, and CF4 are the expected cash flows in each year, r is the required rate of return, and Initial Investment is the cost of the manufacturing equipment. Plugging in the given values:

NPV = 725,000/(1+0.15) + 850,000/(1+0.15)^2 + 1,200,000/(1+0.15)^3 + 1,500,000/(1+0.15)^4 - 1,750,000

Calculating this expression, we find that the NPV of the project is $4,669,806.