A company is considering an iron ore extraction project which requires an initia
ID: 2486401 • Letter: A
Question
A company is considering an iron ore extraction project which requires an initial investment of $516,000 and will yield annual cash flows of $158,000for 4 years. Thecompany's hurdle rate is 9%. What is the NPV of the project?
Present value of annuity of$1.
8%
9%
10%
1
0.926
0.917
0.909
2
1.783
1.759
1.736
3
2.577
2.531
2.487
4
3.312
3.24
3.17
5
3.993
3.89
3.791
6
4.623
4.486
4.355
7
5.206
5.033
4.868
8
5.747
5.535
5.335
9
6.247
5.995
5.759
10
6.71
6.418
6.145
A. positive $103,200
B. negative $103,200
C. positive $4,080
D. negative $4,080
8%
9%
10%
1
0.926
0.917
0.909
2
1.783
1.759
1.736
3
2.577
2.531
2.487
4
3.312
3.24
3.17
5
3.993
3.89
3.791
6
4.623
4.486
4.355
7
5.206
5.033
4.868
8
5.747
5.535
5.335
9
6.247
5.995
5.759
10
6.71
6.418
6.145
Explanation / Answer
Answer : D. negative $4,080
=> future cash flow - initial outflow = 158000 * PVIFA(9% 4) i.e. 3.24 - 516000 = - 4080
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