ICANBusiness, Management and FinanceBusiness and its Environment2021

Zenith Manufacturing Plc is appraising a new project with the following cash flows: initial investment of ₦50,000,000; net cash inflows of ₦18,000,000 per annum for four years; cost of capital 12%. The annuity factor (PVIFA) for 12%, 4 years is 3.0373. What is the Net Present Value (NPV) of the project, and what investment decision should management take?

ANPV = ₦4,671,400 (positive); accept the projectCORRECT
BNPV = −₦4,671,400 (negative); reject the project
CNPV = ₦22,000,000 (positive); accept the project
DNPV = ₦3,200,000 (positive); accept the project
AI
Toaster Teacher
Why the answer is A, and why the others tempt you.
NPV = (Annual cash inflow × PVIFA) − Initial investment = (₦18,000,000 × 3.0373) − ₦50,000,000 = ₦54,671,400 − ₦50,000,000 = ₦4,671,400. Since the NPV is positive, the project generates value above the required return of 12% and should be accepted. A positive NPV is the standard accept criterion under the NPV decision rule.
Want this in Pidgin, Yoruba, Igbo or Hausa? Sign up free →

Practice more Business, Management and Finance questions

ICAN Business, Management and Finance has thousands more questions like this — with Worked answers on every one.

Start practicing free →See all Business, Management and Finance questions