darling industries is evaluating a proposed capital budgeting project that will

Question

darling industries is evaluating a proposed capital budgeting project that will require an initial investment of $160,000. the project is expected togenerate the following net cash fows,

Year 1=$43,600,

Year 2=$51,500,

Year 3=$48,000,

Year 4=$46,900

Assume the desired rate of return on this project type is 11%.What is the net present value of this project?

Suppose Darling Industries has enough capital to fund the project, and the project is not competing for funds with another project should they accept or rejectthe project?

Explanation / Answer

The Answer is as follows:

Comput the Net present Value of the project.

Therefore, the NPV of the project is -12,930.5.

Conclusion:

As the NPV of the project is negative the project is not accepted. It is not about the initial investment the cash inflows should be increased to get positive NPV.

Even though the project does not have competition with other projects the project can't be accepted with negative NPV.

Year Cash Flows Discount@11% Present Value of cash flows 0 -160000 1 -160000 1 43600 0.900900901 39279.28 2 51500 0.811622433 41798.56 3 48000 0.731191381 35097.19 4 46900 0.658730974 30894.48 Net Present Value -12930.5

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