The financial manager at Genesis Co is looking into the purchase of an apartment

Question

The financial manager at Genesis Co is looking into the purchase of an apartment complex for $150,000. Net after-tax cash flows are expected to be $60,000 for each of the next 2 years, then drop to $50,000 for two year. Genesis' required rate of return is 9% on projects of this nature. After four years, Genesis Co. expects to sell the property for after tax proceeds of $2,000 at fifth year.

a) What is the NPV on this project? Show your work.

b) Suppose the required rate of return on Genesis Co is 15%, will the company invest this project? Why or why not? Explain.

Explanation / Answer

Required Rate of Return = 9% Year Cashflows Present Value Factor Present Value 0 (150,000.00) 1 (150,000.0000) 1        60,000.00 0.917431193        55,045.8716 2        60,000.00 0.841679993        50,500.7996 3        50,000.00 0.77218348        38,609.1740 4        50,000.00 0.708425211        35,421.2606 5          2,000.00 0.649931386          1,299.8628 Net Present Value        30,876.9685 Decision: Invest in this project Required Rate of Return = 15% Year Cashflows Present Value Factor Present Value 0 (150,000.00) 1 (150,000.0000) 1        60,000.00 0.869565217        52,173.9130 2        60,000.00 0.756143667        45,368.6200 3        50,000.00 0.657516232        32,875.8116 4        50,000.00 0.571753246        28,587.6623 5          2,000.00 0.497176735              994.3535 Net Present Value        10,000.3605 Decision: Invest in this project

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