Question

Current Attempt in Progress * Your answer is incorrect. Blossomrecently invested in a project with a 3-year life span. The net present value was $10400 and annual cash inflows were $35000 for year 1: $37000 for year 2: and $39000 for year 3. The initial investment for the project, assuming a 15% required rate of return, was Present Value Year of 1 at 15% 0.870 0.756 0.658 PV of an Annuity of 1 at 15% 0.870 1.626 2.283 O $69746. • $86170 O $62638. O $73684 Next

Answer 1

(1)

OPTION: $73684

EXPLANATION:

Net present value = present value of annual cash flows - initial investment

initial investment = present value of annual cash flows - net present value

= ($35000 x 0.870) + ($37000 x 0.756) + ($39000 x 0.658) - $10400

= $30450 + $27972 + $25662 - $10400

= $73684

(2)

OPTION: A decrease in the discount rate

EXPLANATION:

A decrease in the discount rate would increase the present value of the annual net cash flow. Therefore increase in present value of the annual net cash flow would result in increased net present value.