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Allstar Company invests in a project with expected cash inflows of $9,000 per year for four years. All cash flows occur at year-end. The required return on investment is 9%. If the project generates a net present value (NPV) of $3,000, what is the amount of the initial investment in the project? Use the present value tables provided in Appendix A and round to the nearest answer option. a. $11,253 b. $13,236 c. $26,160 d. $29,160

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Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663

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Chapter
Section
BuyFindarrow_forward

Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663
Chapter 26, Problem 3CMA
Textbook Problem
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Allstar Company invests in a project with expected cash inflows of $9,000 per year for four years. All cash flows occur at year-end. The required return on investment is 9%. If the project generates a net present value (NPV) of $3,000, what is the amount of the initial investment in the project? Use the present value tables provided in Appendix A and round to the nearest answer option.

  1. a. $11,253
  2. b. $13,236
  3. c. $26,160
  4. d. $29,160

To determine

Compute the amount of initial investment in the project.

Explanation of Solution

Net present value method: Net present value method is used to compare the initial cash outflow of the investment with the present value of its cash inflows. In the net present value, the interest rate is determined by the business based on the net income received from the investment. This is also called as the discounted cash flow method. The net present value is computed as follows:

NPV=(Presentvalueofcashflows)Initialcashoutflow

Calculate the present value of Cash inflows:

Presentvalueofcashinflows}=Cashinflow×3

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Chapter 26 Solutions

Financial And Managerial Accounting
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