Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

Mendez Company has identified an investment project with the following cash flows: Year 0: $-\$10,000$, Year 1: \$4,000, Year 2: \$4,000, Year 3: \$4,000. If the required rate of return is 10\%, what is the net present value (NPV) of the project?

$1,241

$2,000

$-1,241

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Verified step by step guidance

Step 1: Understand the concept of Net Present Value (NPV). NPV is a method used to evaluate the profitability of an investment by calculating the present value of all cash inflows and outflows using a discount rate (in this case, 10%). The formula for NPV is: $ NPV = \sum \frac{C_t}{(1 + r)^t} $, where $C_t$ is the cash flow at time $t$, $r$ is the discount rate, and $t$ is the year.

Step 2: Identify the cash flows and the discount rate. The cash flows are: Year 0: $-\$10,000$, Year 1: \$4,000\, Year 2: \$4,000\, Year 3: \$4,000\, and the discount rate is $10\%$ or $0.10$.

Step 3: Apply the NPV formula to each cash flow. For Year 0, the cash flow is $-\$10,000$, and since it occurs at $t = 0$, it is not discounted. For Year 1, Year 2, and Year 3, discount each cash flow using the formula $ \frac{C_t}{(1 + r)^t} $. For example, the discounted cash flow for Year 1 is $ \frac{4,000}{(1 + 0.10)^1} $.

Step 4: Sum the discounted cash flows. Add the discounted values for Year 0, Year 1, Year 2, and Year 3 to calculate the total NPV. The formula becomes: $ NPV = -10,000 + \frac{4,000}{(1 + 0.10)^1} + \frac{4,000}{(1 + 0.10)^2} + \frac{4,000}{(1 + 0.10)^3} $.

Step 5: Compare the calculated NPV to the given answer choices. Once the NPV is calculated, match it to the closest value among $\$1,241$, $\$2,000$, $-\$1,241$, and $\$0$.