T-Bone company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows is $141,000. Should the company invest in this project? a. no, because net present value is - $9,000 b. yes, because net present value is - $9,000 c. yes, because net present value is + $9,000 d. no, because net present value is + $9,000

Question

Business

Liam Mclean

8 January, 07:39

T-Bone company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows is $141,000. Should the company invest in this project? a. no, because net present value is - $9,000 b. yes, because net present value is - $9,000 c. yes, because net present value is + $9,000 d. no, because net present value is + $9,000

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Answers (1)

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Trey Ortiz · Answer 1

The correct answer is:

no, because net present value is - $9,000 (a.)

Explanation:

The aim of investments normally is to yield profit, and this means that the return on investments should be greater than the amount invested, hence yielding a positive (+) net value. In this example, the amount to be invested is $150,000 and the return on investment (present value of the future cash flows) is expected to be $141,000.

The net value of the investment is calculated as:

Net value = Future cash flows - amount to be invested

Net value = 141,000 - 150,000 = - $9,000

This means that the total return on the original invested is less than the original investment by $9,000, which is a loss, therefore the company should not invest in the project.