Meyer, Inc. is considering a five-year project that has an initial aft

Meyer, Inc. is considering a five-year project that has an initial after-tax outlay or after-tax cost of $70,000. The future after-tax cash inflows from its project for years 1, 2, 3, 4 and 5 are all the same at $35,000.

Meyer uses the net present value method and has a discount rate of 10%. Will Meyer accept the project?
A) Meyer accepts the project because the NPV is about $69,455.
B) Meyer accepts the project because the NPV is about $62,678.
C) Meyer rejects the project because the NPV is about -$13,382.
D) Meyer rejects the project because the NPV is less than -$33,021.

ANSWER

Answer: B
Explanation: B) The future after-tax cash inflows are an annuity. Thus, we can use:
NPV = -CF0 + (PMT × . Inserting the given values gives:
NPV = -$70,000 + = -$70,000 + ($35,000 × 3.790787)
= -$70,000 + $132,677.54 = $62,677.54. Thus, Meyer accepts the project since it has a positive NPV.
Using the NPV function in Excel yields the same answer.