Smart Solutions Inc. is evaluating a capital project for expansion. The project costs $10,000, and it is expected to generate $5,000 per year for three years. If the firm's required rate of return is 10 percent, what is the project's terminal value?

d) $16,550

Explanation:

First, The multiple options to the question

a) $12,500

b) $11,550

c) $14,050

d) $16,550

e) $15,000

Question: To determine the terminal value of the project

What do we know:

The Cash flow from the project is $5,000 per year and the rate is 10%

To determine the future value per year is as follows

Year 1 = (1+r) ∧2 = (1+0.1) ∧2 = 1.21

Year 2 = (1+r) ∧1 = (1+0.1) ∧1 = 1.1

Year 3 = (1+r) ∧0 = (1+0.1) ∧0 = 1

Based on these determinations, we determine the yearly value as follows

Year 1 = 5,000 (1.21) = $6,050

Year 2 = 5,000 (1.1) = $5,500

Year 3 = 5,000 (1) - = $5000

The terminal value = The total of the three years

= $6,050 + $5,500 + $5,000

= $16,550