CIMA BA1 · Chapter 13 · Question 7 of 10
A project requires an initial investment of $20,000 and is expected to generate net cash inflows of $8,000 at the end of each of the next three years. Using a cost of capital of 9% a year, what is the net present value (to the nearest dollar)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $250
Explanation
Three-year annuity factor at 9% = (1 - 1.09^-3) / 0.09 = 2.5313. PV of inflows = 8,000 x 2.531295 = $20,250.36. NPV = 20,250.36 - 20,000 = $250 (rounded). The NPV is positive, so the project should be accepted.
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