Question

Machida Inc. is considering a project that is expected to produce cash inflows of $3,200 per year in years 1-4, with a final cash inflow of $5,700 in year 5. The project's initial cost is $9,800 and Machida's discount rate is 17 percent. Should Machida accept the project

Answer 1

Answer:

The NPV = $1578.185602 rounded off to $1578.19

As the NPV is positive, the project should be accepted.

Explanation:

The Net Present Value or NPV is a tool used to evaluate projects. It is used with various other tools to decide whether to undertake a project or not. To calculate the Net Present Value or NPV, we take the present value of the cash inflows provided by the project and deduct the initial cost of the project.  If the NPV is positive, we should proceed with the project and vice versa.

NPV = CF1 / (1+r)  +  CF2 / (1+r)^2  +  ...  + CFn / (1+r)^n  -  Initial Cost

Where,

• CF1, CF2, ... represents cash flow in Year 1, Year 2 and so on.

• r is the required rate of return

NPV = 3200 / (1+0.17)  +  3200 (1+0.17)^2  +  3200 (1+0.17)^3  +  

3200 (1+0.17)^4  +  5700 (1+0.17)^5  -  9800

NPV = $1578.185602 rounded off to $1578.19