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The present value of the future net cash flows from an asset is $118,016 and the asset costs $130,000. What follows?
ANet present value is $11,984 and it is accepted
BNet present value is $248,016 and it is accepted
CNet present value is negative $11,984 and rejected
DNet present value is negative $30,000 and rejected
Answer & Solution
Correct answer: C. Net present value is negative $11,984 and rejected
1. Net present value subtracts the purchase price from the present value of the future net cash flows.
2. $118,016 minus $130,000 gives negative $11,984.
3. An investment is viable only when the present value of its cash flows exceeds the price paid.
4. Here the discounted inflows fall short, so the proposal is rejected.
5. Reading the $11,984 as positive reverses the comparison and turns a failing proposal into a passing one.
6. The same cash flows were acceptable at a cost of $100,000, so the price alone flipped the decision.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.8 Capital Investment Analysis_
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