Question

James Construction Co. is considering a new inventory system that will cost

$950,000. The system is expected to generate positive cash flows over the next
four years in the amounts of $350,000 in year one, $350,000 in year two,
$150,000 in year three, and $180,000 in year four. The required rate of return is
8%. What is the net present value of this project (rounded to the nearest dollar)?
1) -$100,328
2) -$74,477
3) $87,417
4) $104,089

Answer 1

The net present value of the project is 2. -$74,102, rounded to the nearest dollar. This is closest to option (2) -$74,477. It is calculated by discounting the future cash flows at the required rate of return of 8% and subtracting the initial investment.

Step-by-step explanation:

To calculate the net present value (NPV) of this project, we need to discount the expected cash flows back to their present value using the required rate of return of 8%. The formula for the present value of future cash flows is:

Present Value = Future Cash Flow / (1 + r)^n

Where r is the rate of return, and n is the number of years.

Now let's calculate:

• 
  
• Year 1: $350,000 / (1 + 0.08)^1 = $324,074
• 
  
• Year 2: $350,000 / (1 + 0.08)^2 = $300,069
• 
  
• Year 3: $150,000 / (1 + 0.08)^3 = $119,377
• 
  
• Year 4: $180,000 / (1 + 0.08)^4 = $132,378

The total present value of the future cash flows is:

$324,074 + $300,069 + $119,377 + $132,378 = $875,898

The cost of the new system is $950,000, so the NPV of the project is:

NPV = Total Present Value - Initial Investment

NPV = $875,898 - $950,000

NPV = -$74,102 (rounded to the nearest dollar)

The closest answer provided in the multiple-choice options is (2) -$74,477. However, note that some small discrepancies could occur due to different rounding methods at each step.