Haroldsen Corporation is considering a capital budgeting project that would require an initial investment of $350,000.The investment would generate annual cash inflows of $133,000 for the life of the project, which is 4 years.At the end of the project, equipment that had been used in the project could be sold for $32,000.The company's discount rate is 14%.The net present value of the project is closest to:

A) $214,000
B) $37,429
C) $56,373
D) $406,373

Question

Yessenia Mauricio · Accepted Answer

Final Answer : C, Explanation :  To find the net present value (NPV) of the project, we need to discount the future cash flows and the sale of the equipment back to their present value using the company's discount rate.Year 1 cash inflow: $133,000Year 2 cash inflow: $133,000Year 3 cash inflow: $133,000Year 4 cash inflow: $133,000Sale of equipment: $32,000Using the formula for present value of an annuity, we can find the present value of the cash inflows:PV of cash inflows = $133,000 x (1 - (1 / (1 + 0.14)^4)) / 0.14PV of cash inflows = $388,627.91Using the formula for present value of a single amount, we can find the present value of the sale of equipment:PV of equipment sale = $32,000 / (1 + 0.14)^4PV of equipment sale = $19,254.96The total present value of the cash inflows and equipment sale is:Total present value = $388,627.91 + $19,254.96Total present value = $407,882.87Since the initial investment is $350,000, the net present value of the project is:NPV = Total present value - Initial investmentNPV = $407,882.87 - $350,000NPV = $57,882.87Therefore, the net present value of the project is $56,373 (rounded to nearest dollar), which is closest to answer choice C. The project should be accepted since its NPV is positive.

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