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21 April, 10:59

Me Online, 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. Sportswear Online uses the net present value method and has a discount rate of 11%. Will Sportswear Online accept the project?

a. Me Online rejects the project because the NPV is about - $22,375.73

b. Me Online accepts the project because the NPV is greater than $10,000.00

c. Me Online rejects the project because the NPV is about - $12,375.60

d. Me Online rejects the project because the NPV is about - $12,375.60

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  1. 21 April, 11:13
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    a. Me Online rejects the project because the NPV is about - $22,375.73

    Explanation:

    The computation of the Net present value is shown below

    = Present value of all yearly cash inflows after applying discount factor - initial investment

    The discount factor should be computed by

    = 1 : (1 + rate) ^ years

    where,

    rate is 11%

    Year = 0,1,2,3,4

    Discount Factor:

    For Year 1 = 1 : 1.11^1 = 0.9009

    For Year 2 = 1 : 1.11^2 = 0.8116

    For Year 3 = 1 : 1.11^3 = 0.7312

    For Year 4 = 1 : 1.11^4 = 0.6587

    So, the calculation of a Present value of all yearly cash inflows are shown below

    = Year 1 cash inflow * Present Factor of Year 1 + Year 2 cash inflow * Present Factor of Year 2 + Year 3 cash inflow * Present Factor of Year 3 + Year 4 cash inflow * Present Factor of Year 4

    = $50,000 * 0.9009 + $60,000 * 0.8116 + $70,000 * 0.7312 + $80,000 * 0.6587

    = $45,045.05 + $48,697.35 + $51,183.40 + $52,698.48

    = $197,624.28

    So, the Net present value equals to

    = $197,624.28 - $220,000

    = - $22,375.80

    We take the first four digits of the discount factor.
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