1 answer

A contract is estimated to yield net annual returns of $24,000 for ten years. To secure...

Question:

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


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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