Question

Fox, Inc. is considering a five- year project that has initial after- tax outlay or after- tax cost of $170,000. The future after- tax cash inflows from its project for years 1 through 5 are $45,000 for each year. Fox uses the net present value method and has a discount rate of 11.25%. Will Fox accept the project?

Answer 1

Answer: Since Net Present Value is negative i.e. -4724.

$\therefore$ Fox will not accept the project.

Explanation:

Net Present Value = Initial after- tax outlay + Cash inflows$\times$PVIFA(11.25%,5)

= -170000 + 45000$\times$PVIFA(11.25%,5)

= -170000 +45000$\times$3.6728

= - 4724

Since Net Present Value is negative i.e. -4724.

$\therefore$ Fox will not accept the project.