A contract is estimated to yield net annual returns of $24,000 for ten years. To secure...
A contract is estimated to yield net annual returns of $24,000 for ten years. To secure the contract, an immediate outlay of $130,000 is required. Interest is 14% compounded annually.
Calculate the net present value (NPV) of the contract and
determine whether the project should be accepted or rejected
according to the net present value criterion.
Should the project be accepted or rejected?
Answer: The project should be rejected b/c NPV= -4,813
would like to know how to get to that answer
Homework Answers
NPV = Present value of cash inflows - present value of cash outflows
NPV = Annuity * [1 - 1 / (1 + r)^n] / r - Initial investment
NPV = 24,000 * [1 - 1 / (1 + 0.14)^10] / 0.14 - 130,000
NPV = 24,000 * [1 - 0.269744] / 0.14 - 130,000
NPV = 24,000 * 5.216116 - 130,000
NPV = 125,186.7755 - 130,000
NPV = -4,813
Project should be rejected because the NPV is negative.
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