The startup costs of a project is $500,000. For years 1 through 5, the annual revenues...
The startup costs of a project is $500,000. For years 1 through 5, the annual revenues are expected to be $210,000, and the annual costs are expected to be $110,000 per year. If the cost of capital is 4%, which of the following is true?
A. The NPV is 0 and the project should be rejected.
B. The NPV is $54,818 and the project should be accepted.
C. The NPV is -$54,818 and the project should be rejected.
D. The NPV is 0 and the project should be accepted.
Homework Answers
Ans C. The NPV is -$54,818 and the project should be rejected.
| Year | Project Cash Flows (i) | DF@ 4% | DF@ 4% (ii) | PV of Project ( (i) * (ii) ) |
| 0 | -500000 | 1 | 1 | (5,00,000) |
| 1 | 100000 | 1/((1+4%)^1) | 0.962 | 96,154 |
| 2 | 100000 | 1/((1+4%)^2) | 0.925 | 92,456 |
| 3 | 100000 | 1/((1+4%)^3) | 0.889 | 88,900 |
| 4 | 100000 | 1/((1+4%)^4) | 0.855 | 85,480 |
| 5 | 100000 | 1/((1+4%)^5) | 0.822 | 82,193 |
| NPV | (54,818) | |||
Cash flow from year 1 to 5 = Revenues - costs = 210000 - 110000 = $ 100000
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