The Horizon Company will invest $62,000 in a temporary project that will generat

Question

The Horizon Company will invest $62,000 in a temporary project that will generate the following cash inflows for the next three years. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year Cash Flow

1. $ 22,000

2. 35,000

3. 32,000

The firm will also be required to spend $16,000 to close down the project at the end of the three years.

a. Compute the net present value if the cost of capital is 12 percent. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.) Net present value $

b. Should the investment be undertaken? No Yes

Explanation / Answer

Cashflow in Year 3 = 32000 - 16000 = 16000

Enter the cashflows in an excel sheet as follows

NPV can be calculated as follows

NPV =NPV(12%,B3:B5)-62000

NPV = -3,066.87

Please note that cells B3 to B5 contains cashflows from year 1 to year 3 respectively.

Since NPV of this project is negative, the investment should not be undertaken

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