US CMA Part 2 · Chapter 8 · Question 6 of 15
Sefton Labs is evaluating a $600,000 investment that will generate after-tax cash inflows of $170,000 per year for 5 years with no salvage value. The required return is 10% (5-year annuity factor 3.7908). What is the NPV (rounded to the nearest dollar)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) $44,436
Explanation
PV of inflows = $170,000 x 3.7908 = $644,436. NPV = $644,436 - $600,000 = $44,436. The project is acceptable because NPV is positive. Ignoring the time value of money gives $250,000, which overstates the gain.
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