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 18 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)

A) $2,875,000
B) $3,830,785
C) $580,785
D) $2, 225,875

Answer 1

The NPV of the project is approximately $580,785.

Step-by-step explanation:

To calculate the NPV of the project, we need to discount the annual cash flows by the required rate of return. The formula for NPV is:

NPV = C1/(1+r) + C2/(1+r)^2 + C3/(1+r)^3 + C4/(1+r)^4 + C5/(1+r)^5 - Initial Cost

Using the given values:

NPV = 1225000/(1+0.18) + 1225000/(1+0.18)^2 + 1225000/(1+0.18)^3 + 1225000/(1+0.18)^4 + 1225000/(1+0.18)^5 - 3250000

Solving this equation gives an NPV of approximately $580,785.