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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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facundobuzzetti

Answer:

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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