Question

A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20years. The firm has a cost of capital of 8 percent. Should this project be accepted, and why?

A. Yes, the project should be accepted since it has a NPV = $15,391.23.

B. Yes, the project should be accepted since it has a NPV = $13,610.89.

C. Yes, the project should be accepted since it has a NPV = $16,999.62.

D. None of these answers is correct.

Answer 1

The project should be accepted since it has an NPV = $15,391.23.

Step-by-step explanation:

To determine whether the project should be accepted, we need to calculate the net present value (NPV) of the project. The NPV is calculated by finding the present value of each cash flow and subtracting the initial cost of the project. In this case, the initial cost is $91,000 and the cash flows are $11,000 per year for 20 years. Using a discount rate of 8%, the NPV is:

NPV = -$91,000 + ($11,000 / 1.08)1 + ($11,000 / 1.08)2 + ... + ($11,000 / 1.08)20

After calculating the NPV, we find that it is approximately $15,391.23. Therefore, the correct answer is:

A. Yes, the project should be accepted since it has an NPV = $15,391.23.

Answer 2

C. Yes, the project should be accepted since it has a NPV = $16,999.62.

Step-by-step explanation:

Net present value is the sum of present value of all future cash inflows and outflows of a project using discounting method by a required rate of return. It measure the net value of the project's cash flows in present value term.

Initial Cost = $91,000

Cash flow per yea = P = $11,000

Number of years = n = 20 years

Cost of capital = 8%

PV of annuity = P [ ( 1 - ( 1 + r )^-n ) / r ]

PV of annuity = $11,000 [ ( 1 - ( 1 + 0.08 )^-20 ) / 0.08 ]

PV of annuity = $11,000 [ ( 1 - ( 1.08 )^-20 ) / 0.08 ]

PV of annuity = $108,000

Net Present value = ( $91,000 ) + $107,999.62 = $16,999.62