Question

Net Present Value Method

Answer 1

Answer:

year               net cash flow

0                     -$150,000

1                        $80,000

2                       $65,000

3                       $50,000

4                       $40,000

A) NPV = -$150,000 + ($80,000 x .87) + ($65,000 x .756) + ($50,000 x .658) + ($40,000 x .572) = -$150,000 + $69,600 + $49,140 + $32,900 + $22,880 = -$150,000 + $174,520 = $24,520

B) Yes , because the net present value indicates that the return on the proposal is greater than the minimum desired rate of return of 15%. Since the NPV is positive ($24,520), it means that the cash inflows are higher than the cash outflows when we use a 15% discount rate.