ICAEW BIP · Chapter 13 · Question 3 of 9
A project needs an investment of £150,000 now and will generate net cash inflows of £42,000 a year for 5 years, starting in one year's time. The cost of capital is 10%, and the 5-year annuity factor at 10% is 3.791. What is the net present value of the project?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) £9,222
Explanation
PV of inflows = £42,000 x 3.791 = £159,222. NPV = £159,222 - £150,000 = £9,222. Because the NPV is positive, the project earns more than the 10% cost of capital and should be accepted on financial grounds.
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