Question

Me Online, Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000. Sportswear Online uses the net present value method and has a discount rate of 11%. Will Sportswear Online accept the project?
a. Me Online rejects the project because the NPV is about -$22,375.73
b. Me Online accepts the project because the NPV is greater than $10,000.00
c. Me Online rejects the project because the NPV is about -$12,375.60
d. Me Online rejects the project because the NPV is about -$12,375.60

Answer 1

Answer:

a. Me Online rejects the project because the NPV is about -$22,375.73

Explanation:

The computation of the Net present value is shown below

= Present value of all yearly cash inflows after applying discount factor - initial investment

The discount factor should be computed by

= 1 ÷ (1 + rate) ^ years

where,  

rate is 11%  

Year = 0,1,2,3,4

Discount Factor:

For Year 1 = 1 ÷ 1.11^1 = 0.9009

For Year 2 = 1 ÷ 1.11^2 = 0.8116

For Year 3 = 1 ÷ 1.11^3 = 0.7312

For Year 4 = 1 ÷ 1.11^4 = 0.6587

So, the calculation of a Present value of all yearly cash inflows are shown below

= Year 1 cash inflow × Present Factor of Year 1 + Year 2 cash inflow × Present Factor of Year 2 + Year 3 cash inflow × Present Factor of Year 3 + Year 4 cash inflow × Present Factor of Year 4

= $50,000 × 0.9009 + $60,000 × 0.8116 + $70,000 × 0.7312 + $80,000 × 0.6587

= $45,045.05 + $48,697.35 + $51,183.40 + $52,698.48

= $197,624.28

So, the Net present value equals to

= $197,624.28 - $220,000

= -$22,375.80

We take the first four digits of the discount factor.