Richman Co. purchased some equipment 3 years ago. The company's required rate of return is 12%, and the net present value of the project was $ (900). Annual cost savings were: $10,000 for year 1; $8,000 for year 2; and $6,000 for year 3.

The amount of the initial investment was

a.

$18,316.

b.

$20,116.

c.

$20,478.

d.

$18,678.

The correct answer is option (C) $20,478

Explanation:

Solution

Given that:

The Net present value is defined as:

Net present value

= Present value of all flow of cash discounted at the rate required of return - Initial investment

Thus,

$ - 900 = 10000/1.12 + 8000 / (1.12) ^2 + 6000 / (1.12) ^3 - The initial investment

So,

Initial Investment = $ 19,578 + $ 900

= $ 20,478

Therefore the amount of initial investment was $20,478