A. An answer of $(316,920) results from two errors. One, the factor for four years was used to discount the cash inflow, which was not correct. And two, the present value of the cash inflow was subtracted from the initial cash outflow. Instead, the initial cash outflow should be subtracted from the present value of the cash inflow.
B. An answer of $23,140 results from discounting the cash inflow at the rate of 16%, which is the project's Internal Rate of Return but which is not the appropriate discount rate to use.
C. An answer of $316,920 results from discounting the cash inflow for four years. However, the receipt of the cash occurs five years after the initial investment.
D. There is only one cash inflow to this project, and it occurs 5 years after the initial cash outflow. The firm's cost of capital is 18%. Therefore, the correct Present Value of $1 factor (from the table given) to use in discounting the cash inflow is .4371. The present value of the cash inflow is .4371 × $7,400,000, or $3,234,540. Subtracting the initial investment of $3,500,000 from the present value of the cash inflow of $3,234,540, we get $(265,460).
