Question

Dax company is considering an investment with an initial cost of $25,000 and net cash flows of $8,000 in year 1, $10,000 in year 2, and $12,000 in year 3.

Assume dax requires a 12% rate of return on its investmentspute the net present value of the investment. Determine whether the investment should be accepted or rejected on the basis of net present value.

Answer 1

The net present value (NPV) of the investment is approximately -$13676.99. The negative NPV suggests that the present value of the net cash flows is less than the initial cost, indicating that the investment should be rejected.

Step-by-step explanation:

To calculate the net present value (NPV) of the investment, we need to discount the net cash flows at the required rate of return. The NPV formula is:

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

Using the given values:

NPV = 8000/(1+0.12)1 + 10000/(1+0.12)2 + 12000/(1+0.12)3 - 25000

Simplifying the expression gives us:

NPV ≈ 8000/1.12 + 10000/1.2544 + 12000/1.4049 - 25000

NPV ≈ 7142.86 + 7969.85 + 8550.30 - 25000

NPV ≈ 11323.01 - 25000

NPV ≈ -13676.99

The NPV of the investment is approximately -$13676.99. A negative NPV means that the present value of the net cash flows is less than the initial cost. Therefore, based on the NPV, the investment should be rejected.