Question

Cortez Art Gallery is adding to its existing buildings at a cost of $2 million. The gallery expects to bring in additional cash flows of $520,000, $700,000, and $1,000,000 over the next three years. Given a required rate of return of 10 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)

A) $1,802,554
B) $197,446
C) -$1,802,554
D) -$197,446

Answer 1

To calculate the NPV (Net Present Value) of the project, we need to discount the future cash flows to their present values. Using the given cash flows and required rate of return, the NPV of this project is approximately -$1,197,446.

Step-by-step explanation:

To calculate the NPV (Net Present Value) of the project, we need to discount the future cash flows to their present values. The formula for NPV is:

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

Where CF1, CF2, and CF3 are the cash flows in each year, r is the required rate of return, and the Initial Investment is the cost of the project.

Let's calculate the NPV using the given values:

NPV = $520,000 / (1+0.10) + $700,000 / (1+0.10)^2 + $1,000,000 / (1+0.10)^3 - $2,000,000

After simplifying the equation, we get:

NPV = $520,000 / 1.10 + $700,000 / 1.21 + $1,000,000 / 1.331 - $2,000,000

Calculating the values:

NPV = $472,727.27 + $578,512.41 + $751,314.80 - $2,000,000

NPV = $802,554.48 - $2,000,000

NPV = -$1,197,445.52

Rounding to the nearest dollar, the NPV of this project is approximately -$1,197,446.