Question

Fimbrez Corporation has provided the following data concerning an investment project that it is considering:

initial investment.............. $360,000

Annual cash flow............. $118,000 per year

Expected life of project..... 4 years

Discount rate................... 12%

The net present value of the project is closest to:

		$358,484
		$360,000
		$(1,516)
		$112,000

Answer 1

Concepts and reason

Capital budgeting: It is the process of planning used to determine the long-term and short-term investment decisions. Based on the result achieved, the investor is able to decide whether to make an investment or not. The investment dictions include accepting a project, purchase of an equipment etc.

Discounting factor: It is a factor used to multiply the cash flows to convert them from future to present and present to future. Generally, discounting factor tables are referred to determine the appropriate factor, based on the discounting rate and the number of periods.

Fundamentals

Net present value: It is one of the discounted cash flow techniques, in this method involves discounting net cash flow to their present value and then matching that present value with the capital expenditure required by the investment. The difference between these two amounts is net present value. Simply net Present Value is difference between the present value of cash inflows and initial investment.

The net present value is a tool used to decide whether or not to accept a project. The project should be accepted, if the net present value is positive and the project should be rejected, if the net present value is rejected.

The net present value is the difference between the present value of cash inflows and the cash outflows.

Use the following table to calculate the present value of annual cash flows of the investment project:

Hence, the present value of annual cash inflows is $358,407.22.

Use the following table to calculate the net present value of the project:

Hence, the net present value of the project is closest to -$1,516.

Ans:

Net present value of the project is closest to - $1,516.