Question

A project requires a cost in Year O (right now) of $7M. The project will then provide a revenue of $3M per year for Years 1-3. Your discount rate is 15%. The NPV of the project is: Between 0 and $1M Less than zero Between $1M and $2M O More than $2M

Answer 1

Answer: Less than zero

Explanation:

Based on the information given, the NPV of the project will be calculated as the present value of cash flow earned minus the initial expenditure.

The present value of cash flow will be:

= 3/(1 + 15%)¹ + 3/(1 + 15%)² + 3/(1 + 15%)³

= 3/(1.15)1 + 3/(1.15)² + 3/(1.15)³

= 3/1.15 + 3/1.3225 + 3/1.520875

= 2.61 + 2.27 + 1.98

= $6.86 million

Then NPV will be:

= $6.86 million - $7 million

= -$1.14 million

Therefore, the correct option is "less than zero".