Manhattan, Inc. is considering an eight-year project that has an initial after-tax outlay or after-tax cost of $180,000. The future after-tax cash inflows from its project for years 1 through 8 are the same at $38,000
Manhattan uses the net present value method and has a discount rate of 11.50%. Will Manhattan accept the project?
A) Manhattan accepts the project because the NPV is about $12,114.
B) Manhattan accepts the project because the NPV is about $11,114.
C) Manhattan rejects the project because the NPV is about -$11,114.
D) Manhattan rejects the project because the NPV is less than -$12,000.
Answer: A
Explanation: A) The future after-tax cash inflows are an annuity. Thus, we can use:
NPV = -CF0 + . Inserting in the given values gives:
NPV = -$180,000 + = -$180,000 + ($38,000 × 5.055637)
= -$180,000 + $192,114.20 = $12,114.20. Thus, Manhattan accepts the project since it has a positive NPV.
Using the NPV function in Excel yields the same answer.
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