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26 June, 10:42

Dweller, Inc. is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000. The future cash inflows from its project are $40,000, $40,000, $30,000 and $30,000 for years 1, 2, 3 and 4, respectively. Dweller uses the net present value method and has a discount rate of 12%. Will Dweller accept the project?

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  1. 26 June, 11:01
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    dweller accept the this project as NPV value is positive

    Explanation:

    Net present value (NPV) of the project is the total sum of the current value of all the outflows & inflows:

    Accept if NPV is positive.

    CF = cash flows

    r = discount rate = 12%

    NPV = - CF_0 + CF_1 / (1 + r) + CF_2 / (1 + r) ^2 + CF_3 / (1 + r) ^3 + CF_4 / (1+r) ^4

    CF_0 = $80000

    CF_1 = $40000

    CF_2 = $30000

    CF_3 = $30000

    discount rate r = 12%

    NPV = - 80000 + 40000 / (1 + 0.12) + 40000 / (1 + 0.12) ^2 + 30000 / (1 + 0.12) ^ 3 + 30000 / (1 + 0.12) ^4

    NPV = - 80000 + 35714.29 + 31887.76 + 21353.41 + 19065.54

    NPV = $28020.99

    therefore dweller accept the this project as NPV value is positive
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