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10 July, 15:34

Geronimo, Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000. Geronimo uses the net present value method and has a discount rate of 11%. Will Geronimo accept the project

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  1. 10 July, 15:55
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    Geronimo shouldn't invest in the project.

    Explanation:

    Giving the following information:

    Initial investment = $220,000.

    The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000.

    The discount rate = 11%

    To calculate the net present value, we need to use the following formula:

    NPV = - Io + ∑[Cf / (1+i) ^n]

    Cf = cash flow

    Io = 220,000

    Cf1 = 50,000/1.11 = 45,045.05

    Cf2 = 60,000/1.11^2 = 48,697.35

    Cf3 = 70,000/1.11^3 = 51,183.40

    Cf4 = 80,000/1.11^4 = 52,698.48

    Total = 197,624.28

    If the NPV is positive, Geronimo should invest in the project.

    NPV = - 220,000 + 197,624.28 = - 22,375.72

    Geronimo shouldn't invest in the project.
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