Answer (C) is correct . The NPV is calculated by discounting the after-tax cash flows by the desired rate of return. The cash flows of this company constitute an annuity of $100,000 per year plus additional flows of $60,000 in Year 1 and $40,000 in Year 2. Thus, the present value of these flows is $418,600 [($100,000 × 3.36 PV of an annuity of $1 for 5 periods at 15%) + ($60,000 × .87 PV of $1 for 1 period at 15%) + ($40,000 × .76 PV of $1 for 2?periods at 15%)]. The NPV is therefore $18,600 ($418,600 – $400,000).
Answer (A) is incorrect because A negative NPV of $64,000 assumes net cash flows of $100,000 per year.
Answer (B) is incorrect because A negative NPV of $14,000 results from discounting the net earnings.
Answer (D) is incorrect because The amount of $200,000 is the undiscounted excess of the cash flows over the investment.
|
The net present value of Willis’ investment is