Choice "B" is correct. The project has a negative net present value of ($1,508.48). Net present value is computed as follows:
Investment | $ (20,000.00) |
Cash inflows ($4,000 x 4.62288) | 18,491.52 |
Net present value | $ (1,508.48) |
Because cash inflows are received at the end of the year, the analysis uses the present value of an ordinary annuity of $1 per period for six periods.Choice "d" is incorrect. Computation should be based on discounted cash inflows using an ordinary annuity factor and the amount of the investment.Choice "c" is incorrect. Since cash inflows are received at the end of the year, the analysis uses the present value of an ordinary annuity of $1 per period for six periods. The annuity due factor would be used if the cash inflows were received at the beginning of each year.Choice "a" is incorrect. Computation should be based on discounted cash inflows using an ordinary annuity factor and the amount of the investment.
