Sun corporation is evaluating a proposed capital budgeting project that will req

Question

Sun corporation is evaluating a proposed capital budgeting project that will require an initial investment of $148000. The project is expected to generate the following net cash flow: Year 1 $41,800

Year 2 $51,200

Year 3 $47,100

Year 4 $45,400

a. Assume the desire rate of return on a project of this type is 11%. what is the net present value of this project?

b. Suppose Sun Corp has enough capital to fund the project and the project is not competing for funding with other projects. Should Sun Corp enterprises accept or reject this project?

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=41800/1.11+51200/1.11^2+47100/1.11^3+45400/1.11^4

=$143558.23

1.NPV=Present value of inflows-Present value of outflows

=$143558.23-$148000

=($4441.77)(Approx)(Negative).

2.Hen e since NPV is negative;project must be rejected.

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