The Horizon Company wil invest $86,000 in a temporary project that wil generate

Question

The Horizon Company wil invest $86,000 in a temporary project that wil generate the folowing cash inflows for the next three years. Use Appendix 8 for an approximate answer but caliauiate your tnal answer using the formula and financial csiculator methods 2 35,000 60,000 The fem will also be required to spend $11,000 to close down the project at the end of the pree yeas cost of capta is 8 percent. (Negativo anount shoud be be indicated by a minus sign De not round intermediate calculations and round your answer to 2 decimal a Conab the net present value places ) present value .Should the invesiment be undertaken? 9as

Explanation / Answer

We can find the net present value of project by finding present value at each cashflow

To find present value we will sue following formula:

Cashflow/(1 + cost of capital)^(respective year)

In below table we will find the present value of cashflow at respective year:

In year 3 cashflow will be $49000 ($60000 - $11000).

So NPV = $4200.93

Since the NPV is positive investment should be undertaken.

0 1 2 3 Cashflow -$86,000.00 $23,000.00 $35,000.00 $49,000.00 Present Value -$86,000.00 $21,296.30 $30,006.86 $38,897.78 NPV $4,200.93

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