A contractor is analyzing a potential project with an initial investment of $500,000, expected annual cash flows of $150,000 for 5 years, and a required return rate of 12%. The project should be:
Correct Answer
B) Accepted, as the NPV is positive
NPV calculation: PV of cash flows = $150,000 × 3.605 (PV factor for 5 years at 12%) = $540,750. NPV = $540,750 - $500,000 = $40,750. Since NPV is positive, the project should be accepted.
Why This Is the Correct Answer
NPV calculation: PV of cash flows = $150,000 × 3.605 (PV factor for 5 years at 12%) = $540,750. NPV = $540,750 - $500,000 = $40,750. Since NPV is positive, the project should be accepted.
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