Aviary, Inc. is considering a five-year project that has initial after-tax outlay or after-tax cost of $170,000. The future after-tax cash inflows from its project for years 1 through 5 are $45,000 for each year
Aviary uses the net present value method and has a discount rate of 11.25%. Will Aviary accept the project?
A) Aviary accepts the project because the NPV is about $5,455.
B) Aviary accepts the project because the NPV is about $165,275.
C) Aviary rejects the project because the NPV is about -$4,725.
D) Aviary rejects the project because the NPV is about -$154,725.
Answer: C
Explanation: C) The future after-tax cash inflows are an annuity. Thus, we can use:
NPV = -CF0 + . Inserting in the given values gives:
NPV = -$170,000 + = -$170,000 + ($45,000 × 3.672771)
= -$170,000 + $165,274.71 = -$4,725.29. Thus, Aviary rejects the project since it has a negative NPV.
Using the NPV function in Excel yields the same answer.
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