Geronimo, Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000. Geronimo uses the net present value method and has a discount rate of 11%. Will Geronimo accept the project

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Business

Moyer

14 April, 00:56

Geronimo, Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000. Geronimo uses the net present value method and has a discount rate of 11%. Will Geronimo accept the project

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Nevaeh Swanson · Answer 1

Geronimo shouldn't invest in the project.

Explanation:

Giving the following information:

Initial investment = $220,000.

The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000.

The discount rate = 11%

To calculate the net present value, we need to use the following formula:

NPV = - Io + ∑[Cf / (1+i) ^n]

Cf = cash flow

Io = 220,000

Cf1 = 50,000/1.11 = 45,045.05

Cf2 = 60,000/1.11^2 = 48,697.35

Cf3 = 70,000/1.11^3 = 51,183.40

Cf4 = 80,000/1.11^4 = 52,698.48

Total = 197,624.28

If the NPV is positive, Geronimo should invest in the project.

NPV = - 220,000 + 197,624.28 = - 22,375.72

Geronimo shouldn't invest in the project.