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.
