To calculate the Net Present Value (NPV) of the project, we use the NPV formula:

$\text{NPV} = \sum \left( \frac{C_t}{(1 + r)^t} \right) - C_0$

Where:

• $C_t$ = cash flow in year $t$
• $r$ = discount rate (8% or 0.08)
• $t$ = year
• $C_0$ = initial investment

The given values are:

• Initial investment ($C_0$) = $100,000
• Annual cash flows ($C_t$) = $40,000 for 3 years
• Discount rate ($r$) = 8% or 0.08

Step-by-step calculation:

1. Year 1: $\frac{40,000}{(1 + 0.08)^1} = \frac{40,000}{1.08} = 37,037.04$

2. Year 2: $\frac{40,000}{(1 + 0.08)^2} = \frac{40,000}{1.1664} = 34,293.55$

3. Year 3: $\frac{40,000}{(1 + 0.08)^3} = \frac{40,000}{1.2597} = 31,754.20$

Total Present Value of Cash Flows:

$37,037.04 + 34,293.55 + 31,754.20 = 103,084.79$

NPV:

$\text{NPV} = 103,084.79 - 100,000 = 3,084.79$

Thus, the closest answer is b. $3,083.88.

Would you like further details or have any questions about this calculation?

Here are 5 related questions:

1. What would happen to the NPV if the discount rate was increased?
2. How does NPV help in making investment decisions?
3. What is the relationship between NPV and the Internal Rate of Return (IRR)?
4. How does extending the project’s life to 5 years affect the NPV?
5. What are the limitations of using NPV in project evaluation?

Tip: A positive NPV means the project is expected to generate more value than its cost, making it a good investment.