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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.

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hyderali230

Answer:

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

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

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