Two projects being considered have the following projected cash flows: What is the NPV of Project...

Question:

Two projects being considered have the following projected cash flows:

Year Project A Project B
0 -100,00 -100,000
1 50,000 10,000
2 40,000 30,000
3 30,000 40,000
4 10,000 60,000

What is the NPV of Project B if the cost of capital were 15%?

A. -$18,750

B. $4,917.70

C. $40,000.00

D. -$8,014.19

Answer and Explanation:

Given -

  • Initial Investment = $100,000
  • Cost of Capital = 15%

First we need to find the present value of cash inflow from Year 1 to Year 4

  • Present Value of Year 1 Cash Flows = Cash Flow / ( 1 + r ) ^ t = 10000 / ( 1 + 0.15 ) ^ 1 = $8,695.65
  • Present Value of Year 2 Cash Flows = Cash Flow / ( 1 + r ) ^ t = 30000 / ( 1 + 0.15 ) ^ 1 = $22,684.31
  • Present Value of Year 3 Cash Flows = Cash Flow / ( 1 + r ) ^ t = 40000 / ( 1 + 0.15 ) ^ 1 = $26,300.65
  • Present Value of Year 4 Cash Flows = Cash Flow / ( 1 + r ) ^ t = 60000 / ( 1 + 0.15 ) ^ 1 = $34,305.19

Therefore,

  • Present Value of Cash Flows from Year 1 to Year 4 = 8,695.65 + 22,684.31 + 26,300.65 + 34,305.19 = $91,985.81

The net present value can be calculated as follows -

  • Net Present Value = Present Value of Cash Inflows - Initial Investment

Or,

  • Net Present Value = 100000 - 91985.81

Or,

  • Net Present Value = -$8,014.19

Therefore,

  • Correct answer is Option (D) -$8,014.19

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