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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Assume that an investment of $1,000 produces a future cash flow of $1,000. The discount factor for this future cash flow is 0.80. The NPV is

  1. a. $0.
  2. b. $110.
  3. c. ($200).
  4. d. $911.
  5. e. None of these.

To determine

Identify NPV when the future cash flow is $1,200 and investment is of $1,000.

Explanation

Net present value:

The remaining balance of present value of a project’s inflows and outflows is known as net present value (NPV). It is a discounting model of capital investment decision. A project with a positive NPV increases the wealth of a firm whereas a project with a negative NPV decreases the wealth of a firm.

Use the following formula to calculate NPV:

NPV=Presentvalueofcashinflow(P)Presentvalueofcashoutflow(I)

Substitute $800 for P and $1,000 for I in the above formula.

NPV=$800$1,000=($200)

Since net present value is ($200), c is the correct answer

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