ExpertMedium2 marksMultiple Choice
ACCA · Question 24 · Budgeting
A project requires an initial investment of $100,000. It will generate cash inflows of $40,000 per year for 3 years. The company's cost of capital is 10%.
The discount factors at 10% are: Year 1 = 0.909, Year 2 = 0.826, Year 3 = 0.751.
What is the Net Present Value (NPV) of the project?
A project requires an initial investment of $100,000. It will generate cash inflows of $40,000 per year for 3 years. The company's cost of capital is 10%.
The discount factors at 10% are: Year 1 = 0.909, Year 2 = 0.826, Year 3 = 0.751.
What is the Net Present Value (NPV) of the project?
Answer options:
A.
$20,000
B.
$99,440
C.
-$560
D.
$560
How to approach this question
Multiply each year's cash flow by its discount factor to find the Present Value (PV). Sum the PVs of the inflows and subtract the initial investment.
Full Answer
C.-$560✓ Correct
Year 1 PV = $40,000 * 0.909 = $36,360
Year 2 PV = $40,000 * 0.826 = $33,040
Year 3 PV = $40,000 * 0.751 = $30,040
Total PV of inflows = $99,440.
NPV = $99,440 - $100,000 = -$560.
Common mistakes
Forgetting to subtract the initial investment.
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