Question

A project requires a $36,000 initial investment and is expected to generate end-of-period annual cash inflows as follows:

Year 1 Year 2 Year 3 Total
$ 14,400 $ 9,200 $ 12,400 $ 36,000

Assuming a discount rate of 14%, what is the net present value (rounded to the nearest whole dollar) of this investment? Selected present value factors for a single sum are shown in the table below:


i = 14% i = 14% i = 14%
n = 1 n = 2 n = 3
0.8772 0.7695 0.6750

Answer 1

The net present value of the investment, rounded to the nearest whole dollar, is approximately -$7,200.

Using the provided present value factors for a single sum:

Present Value (PV) of Year 1 cash inflow = $14,400 /
`(1 + 0.14)^1` ≈ $12,631.58

PV of Year 2 cash inflow = $9,200 /
`(1 + 0.14)^2` ≈ $7,406.36

PV of Year 3 cash inflow = $12,400 /
`(1 + 0.14)^3` ≈ $8,762.40

Now, calculate the NPV:

NPV = PV of Year 1 + PV of Year 2 + PV of Year 3 - Initial Investment

NPV = $12,631.58 + $7,406.36 + $8,762.40 - $36,000

NPV ≈ $-7,199.66

Therefore, the net present value of the investment, rounded to the nearest whole dollar, is approximately -$7,200.