Empire Industries is considering adding a new product to its lineup. This product is expected to generate sales for four years after which time the product will be discontinued. What is the project's net present value if the firm wants to earn a 13 percent rate of return?

Year. Cash Flow

0 - - - - 62,000

1 - - - 16.500

2 - - - 23,800

3 - - - 27,100

4 - - - 23,300

a. $3,505.52

b. $3,767.24

c. $4,312.65

d. $4,519.58

e. $4,902.71

Answer: C. $4,312.65

Explanation:

Given the following;

Cashflow:

Year 0 - - - - 62,000

Year 1 - - - 16,500

Year 2 - - - 23,800

Year 3 - - - 27,100

Year 4 - - - 23,300

Net present value (NPV)

Internal Rate of Return (IRR) = 13% = 0.13

Using the formula;

NPV = year 0 + (year 1 : (1+IRR)) + (year 2 : (1+IRR) ^2) + (year 3 : (1+IRR) ^3) + (year 4 : (1+IRR) ^4)

NPV = - $62,000 + ($16,500 : (1.13)) + ($23,000 : (1.13) ^2) + ($27,100 : (1.13) ^3) + ($23,300 : (1.13) ^4)

NPV = - $62,000 + $14,601.77 + $18,638.89 + $18,781.66 + $14,290.33 = $4,312.65

The project's net present value if the firm wants to earn a 13 percent rate of return is c. $4,312.65

Explanation:

The Net Present Value of a Project is Calculated by Taking the Present Day (Discounted) Value of All future Net Cashflows based on the Business Cost of Capital and Subtracting the initial Cost of the Investment.

Using A Financial Calculator Cf Function:

Cf0 = - 62,000

Cf1 = 16.500

Cf2 = 23,800

Cf3 = 27,100

Cf4 = 23,300

IRR = 13 %

NPV = 4,312.65