ExpertHard1 markMultiple Choice
CPA · Question 14 · Area I: Business Analysis
Project Alpha requires an initial investment of $100,000. It is expected to generate net cash flows of $40,000 per year for 3 years. The company's required rate of return is 10%. <br/>PV factors for 10%: Year 1 (0.909), Year 2 (0.826), Year 3 (0.751). <br/>Calculate the Net Present Value (NPV) of the project.
Project Alpha requires an initial investment of $100,000. It is expected to generate net cash flows of $40,000 per year for 3 years. The company's required rate of return is 10%. <br/>PV factors for 10%: Year 1 (0.909), Year 2 (0.826), Year 3 (0.751). <br/>Calculate the Net Present Value (NPV) of the project.
Answer options:
A.
($560)
B.
$20,000
C.
$99,440
D.
$560
How to approach this question
NPV = PV of Future Cash Flows - Initial Investment. Sum the PV factors for the annuity and multiply by the annual cash flow.
Full Answer
A.($560)✓ Correct
A
PV Factor Sum = 2.486. PV Inflows = $40,000 * 2.486 = $99,440. NPV = $99,440 - $100,000 = ($560). The project destroys value.
Common mistakes
Calculating undiscounted cash flow; forgetting to subtract initial investment.
Practice the full CPA BAR Practice Exam 2
50 questions · hints · full answers · grading
More questions from this exam
Q01Orion Manufacturing provided the following data for the current year:<br/><br/>- Net Sales: $5,00...HardQ02A company has a Debt-to-Equity ratio of 1.5 and a Times Interest Earned (TIE) ratio of 4.0. The c...HardQ03An analyst is reviewing a company's quarterly revenue data using a visualization tool. The trend ...HardQ04TechSolutions Inc. reports Net Income of $500,000. The following items are included in the calcul...HardQ05A company is implementing a Balanced Scorecard. They have identified 'Employee Training Hours per...Hard