Your company is considering an investment with the following expected cash flows

Question

Your company is considering an investment with the following expected cash flows:
Initial Investment = $407,596
Operating Cash Flows = $73,428 per year
Terminal Cash Flow = $11,872.
The company's WACC is 11% for similar risk projects. The proposed project would have an expected life of 9 years. Your boss asks you to do the analysis. You would tell your boss this proposed project ___ because ____.

Answer

is acceptable; NPV is about $3,620

is acceptable; NPV is zero

should be rejected; NPV is about -$5,660 [negative $5,660].

should be rejected; NPV is zeroo

is acceptable; NPV is about $3,620

is acceptable; NPV is zero

should be rejected; NPV is about -$5,660 [negative $5,660].

should be rejected; NPV is zeroo

Explanation / Answer

Hi,

Please find the answer as follows:

NPV = -407596 + 73428/(1+.11)^1 + 73428/(1+.11)^2 + 73428/(1+.11)^3 + 73428/(1+.11)^4 + 73428/(1+.11)^5 + 73428/(1+.11)^6 + 73428/(1+.11)^7 + 73428/(1+.11)^8 + 73428/(1+.11)^9 + 11872/(1+.11)^9 = 3619.85 or 3620

Option A (is acceptable (NPV is about $3,620) is the correct answer.

Thanks.

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