ExpertMedium1 markMultiple Choice
CPA · Question 11 · Area I: Business Analysis
Project Alpha requires an initial investment of $100,000. It is expected to generate net cash inflows of $40,000 at the end of Year 1, $40,000 at the end of Year 2, and $50,000 at the end of Year 3. The company's required rate of return is 10%.<br/><br/>Discount factors for 10%: Year 1 (0.909), Year 2 (0.826), Year 3 (0.751).<br/><br/>What is the Net Present Value (NPV) of the project?
Project Alpha requires an initial investment of $100,000. It is expected to generate net cash inflows of $40,000 at the end of Year 1, $40,000 at the end of Year 2, and $50,000 at the end of Year 3. The company's required rate of return is 10%.<br/><br/>Discount factors for 10%: Year 1 (0.909), Year 2 (0.826), Year 3 (0.751).<br/><br/>What is the Net Present Value (NPV) of the project?
Answer options:
A.
$30,000
B.
$6,950
C.
$106,950
D.
$5,450
How to approach this question
Multiply each cash flow by its discount factor. Sum the PVs. Subtract the initial investment.
Full Answer
B.$6,950✓ Correct
B
PV Year 1: $40,000 x 0.909 = $36,360<br/>PV Year 2: $40,000 x 0.826 = $33,040<br/>PV Year 3: $50,000 x 0.751 = $37,550<br/>Total PV of Inflows = $106,950<br/>Less Initial Investment = ($100,000)<br/>NPV = $6,950.
Common mistakes
Forgetting to subtract initial investment; using wrong discount factors.
Practice the full CPA BAR Practice Exam 4
50 questions · hints · full answers · grading
More questions from this exam
Q01Orion Corp. is analyzing its working capital efficiency. For the current year, Orion reported the...HardQ02A company is analyzing its gross margin variance. The budgeted data for the quarter indicated sal...MediumQ03TechSolutions Inc. reports the following financial data:<br/>- Net Income: $5,000,000<br/>- Inter...HardQ04Manufacturing Corp. uses Activity-Based Costing (ABC). The company has identified two cost pools:...MediumQ05During the current month, a company purchased 20,000 pounds of raw material for $42,000. The stan...Medium