ACCA FM · Chapter 6 · Question 3 of 10
A project requires an investment of $250,000 now and will generate net cash inflows of $70k, $80k, $90k and $60k at the end of years 1 to 4 respectively. The cost of capital is 10%. Using discount factors rounded to 3 decimal places, what is the net present value?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) -$11,720
Explanation
PV of inflows = 70,000 x 0.909 + 80,000 x 0.826 + 90,000 x 0.751 + 60,000 x 0.683 = 63,630 + 66,080 + 67,590 + 40,980 = $238,280. NPV = $238,280 - 250,000 = -$11,720, so the project should be rejected. Treating the year 1 flow as arising now gives +$12,120, and ignoring discounting gives +$50,000.
More Investment appraisal techniques MCQs
- Q5A project costs $100,000 and generates net cash inflows of $40,000 a year for four years, arising evenly through each year. The cost of…
- Q6A company has spent $45,000 on market research to assess whether to launch a new product. In appraising the launch, how should this cost…
- Q7What is the present value of $25,000 received at the end of each year for 5 years, at a discount rate of 8%? Use an annuity factor rounded…
- Q8An investment will generate $50,000 a year in perpetuity, with the first receipt at the end of year 3. The discount rate is 10%. What is…
- Q9Which of the following is an advantage of net present value (NPV) over internal rate of return (IRR) as an investment appraisal method?