A project requires an initial investment of $2,000 and yields inflows of $1,200 in year 1 and $900 in year 2. Discount rate is 8%. What is the NPV?

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Study for the Finance and Investment Challenge Test. Approaches include flashcards and multiple-choice questions with hints and explanations. Ready yourself to ace the exam!

Multiple Choice

A project requires an initial investment of $2,000 and yields inflows of $1,200 in year 1 and $900 in year 2. Discount rate is 8%. What is the NPV?

Explanation:
The concept being tested is how to determine the value of a project today by comparing the present value of its future cash inflows to the initial cost. You discount each future cash inflow back to today and then subtract the upfront investment. Compute the present values using an 8% discount rate: - Year 1: 1200 / 1.08 ≈ 1111.11 - Year 2: 900 / (1.08)^2 ≈ 771.61 Add these present values: 1111.11 + 771.61 ≈ 1882.72. Subtract the initial investment of 2000: 1882.72 − 2000 ≈ -117.28. So the NPV is about -117.28. A negative result means the project doesn’t meet the 8% return requirement at this discount rate, so it would not be pursued under a positive-NPV criterion. The other numbers would arise from misapplying discounting or ignoring inflows entirely, but when you discount correctly, the present value of inflows is less than the initial outlay, yielding the negative NPV shown.

The concept being tested is how to determine the value of a project today by comparing the present value of its future cash inflows to the initial cost. You discount each future cash inflow back to today and then subtract the upfront investment.

Compute the present values using an 8% discount rate:

  • Year 1: 1200 / 1.08 ≈ 1111.11

  • Year 2: 900 / (1.08)^2 ≈ 771.61

Add these present values: 1111.11 + 771.61 ≈ 1882.72. Subtract the initial investment of 2000: 1882.72 − 2000 ≈ -117.28.

So the NPV is about -117.28. A negative result means the project doesn’t meet the 8% return requirement at this discount rate, so it would not be pursued under a positive-NPV criterion.

The other numbers would arise from misapplying discounting or ignoring inflows entirely, but when you discount correctly, the present value of inflows is less than the initial outlay, yielding the negative NPV shown.

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