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A capital investment project requires an investment of £100,000 and has an expected life of four...

A capital investment project requires an investment of £100,000 and has an expected life of four years. Annual cash flows, which occur evenly throughout 5 years amount to £45,000 per annum. The net present value of the project using a 12 percent discount rate is

Select one:

a. £33,732

b. £68,162

c. £62,225

d. £98,980

e. £28,162

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Answer #1

Formula for Net present value = Discounted Inflow of benefits - Discounted outflow of resources.

Discounted outflow = 100,000

The inflow is an annuity occuring for 5 years , annually 45,000.

Discount rate is 12%.

Formula for discounted inflow = annual inflow x Annuity factor

With reference to annuity tables, Annuity factor for 5 years at a discount rate of 12% is 3.605.

So Discounted inflow = 45,000 x 3.605 = 162,225.

Therefore, Net present value = 162,225 - 100,000 = 62,225.

The option is C.

PS: Please use "Thums Up" if you are contented with my solution and presentation.

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