Question

Murray is planning a project that will cost $22,000. The annual cash inflow, net of income taxes, will be $5,000 a year for 7 years. The present value of $1 at 12% is as follows:

Answer 1

Answer:

Net Present Value = $22,815 - $22,000 = $815

Since the value is positive the project shall be accepted.

Explanation:

Cost of project = $22,000

That is initial outflow.

Cash inflow = $5,000 each for 7 years.

Expected rate of return for 7  years = 12%

Therefore, Present value of $1 for 7 years @ 12% = 4.563

Therefore, Cumulative present value of cash flow = $5,000 $\times$ 4.563 = $22,815.

Net Present Value = $22,815 - $22,000 = $815

Since the value is positive the project shall be accepted.