Question

13.	Johnson Entertainment Systems is setting up to manufacture a new line of video game consoles. The cost of the manufacturing equipment is $1,850,000. Expected cash flows over the next four years are $745,000, $950,000, $1,150,000, and $1,450,000. Given the company's required rate of return of 12.5 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)
	A)	$1,275,749
	B)	$2,919,806
	C)	$4,669,542
	D)	$3,122, 607

Answer 1

The NPV of the project is computed as shown below:

= Initial Investment + Cash flow in year 1 / ( 1 + required rate of return )¹ + Cash flow in year 2 / ( 1 + required rate of return )² + Cash flow in year 3 / ( 1 + required rate of return )³ + Cash flow in year 4 / ( 1 + required rate of return )⁴

= - $ 1,850,000 + $ 745,000 / 1.125¹ + $ 950,000 / 1.125² + $ 1,150,000 / 1.125³ + $ 1,450,000 / 1.125⁴

= $ 1,275,749 Approximately

So the correct answer is option A i.e. $ 1,275,749

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