Rogue River, Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000
Rogue River uses the net present value method and has a discount rate of 11%. Will Rogue River accept the project?
A) Rogue River accepts the project because the NPV is greater than $10,000.00.
B) Rogue River rejects the project because the NPV is about -$22,375.73.
C) Rogue River rejects the project because the NPV is about -$12,375.60.
D) Rogue River rejects the project because the NPV is about -$2,375.60.
Answer: B
Explanation: B) NPV = -CF0 + + + +
= -$220,000 + + + +
= -$220,000 + $45,045.05 + $48,697.35 + $51,183.40 + $52,698.48
= -$220,000 + $197,624.27 = -$22,375.73.
Thus, Rogue River rejects the project since it has a negative NPV.
Using the NPV function in Excel yields the same answer.
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