ACCA MA · Chapter 11 · Question 5 of 10
A project costs $100,000 now and will generate cash inflows of $35,000 a year for 4 years, starting one year from now. The cost of capital is 10%, and the 4-year annuity factor at 10% is 3.170. What is the net present value?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) $10,950
Explanation
PV of inflows = 35,000 x 3.170 = $110,950. NPV = 110,950 - 100,000 = $10,950, which is positive, so the project should be accepted. $40,000 is the undiscounted surplus, and the other figures use annuity factors for 3 or 5 years instead of 4.
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