Question

Use the following table:

Present Value of an Annuity of 1
Period 8% 9% 10%
1 0.926 0.917 0.909
2 1.783 1.759 1.736
3 2.577 2.531 2.487

A company has a minimum required rate of return of 9%. It is considering investing in a project which costs $450000 and is expected to generate cash inflows of $200000 at the end of each year for three years. The net present value of this project is:________

a. $100000.
b. $506200.
c. $56200.

Answer 1

c. $56,200

Step-by-step explanation:

The cash inflows = $200,000, r = required rate of return = 9%, n = number of years = 3

Present Value of Annuity Factor (9%,3) = 2.531

Net Present Value of the Project = Cash inflows * Present Value of Annuity Factor (r,n) - Cost of Project

Net Present Value of the Project = ($200,000 * 2.531) - $450,000

Net Present Value of the Project = $506,200 - $450,000

Net Present Value of the Project = $56,200