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

Simpson, Inc. is considering a five-year project that has an initial after-tax outlay or after-tax cost of $80,000. The respective future cash inflows from its project for years 1, 2, 3, 4 and 5 are: $15,000, $25,000, $35,000, $45,000 and $55,000.

Simpson uses the net present value method and has a discount rate of 9%. Will Simpson accept the project?
A) Simpson accepts the project because the NPV is $129,455.25.
B) Simpson accepts the project because the NPV is 79,455.25.
C) Simpson accepts the project because the NPV is $49,455.25.
D) Simpson accepts the project because the NPV is less than zero.

ANSWER

Answer: C
Explanation: C) NPV = -CF0 + + + + +
= -$80,000 + + + + +
= -$80,000 + $13,761.47 + $21,042.00 + $27,026.42 + $31,879.13 + $35,746.23
= -$80,000 + $129,455.25 = $49,455.25.
Thus, Simpson accepts the project since it has a positive NPV.
Using the NPV function in Excel yields the same answer.