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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

A project that will cost $120,000 is estimated to generate cash flows of $25,000 per year for eight years. What is the net present value of the project, assuming a 1O% required rate of return? (Use thepresent value tables in this chapter.)

A. $11,675

B. $13,375

C. $75,000

D. $95,000

To determine

Concept Introduction:

NPV:

Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:

  NPV = Present value of cash inflows  Present value of cash out flows

To Calculate:

The Net present value of the project

Explanation

The Net present value of the project is calculated as follows:

    Annuity Cash flow (A) $ 25,000
    Annual required return % 10%
    Number of Years 8
    Present value of $1 Annuity (10%, 8 Periods) (B) 5...

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