A company is considering expanding its facilities. This would create an increase
ID: 2754551 • Letter: A
Question
A company is considering expanding its facilities. This would create an increase in after-tax net cash flow of $1,500,000 annually for 20 years. The expansion would require a capital investment (an initial outlay) of $5,800,000 today, and another $2,300,000 one year from now. If the appropriate cost of capital is 13%, what is the Net Present Value (NPV) of this project? (Select the closest answer and please show all work and steps) Thanks.
A.$ 2.43 million
B. $2.70 million
C. $3.52 million
D. $3.61 million
E. $3.83 million
Explanation / Answer
Answer is B i.e $ 2.70 million
Detailed answer
Annual Cash flows $ 1,500,000
Cash flows occur for 20 years
Annuity factor for 20 years at 13% cost of capital 7.025
Total discoutned cash inflows ($ 1,500,000 x 7.025) $ 10,537,000
Total present value of Investment
Inial investment $ 5,800,000
Add;Discounted value of investment made after one year $ 2,300,000 x 0.885=$ 2,035,500
Total Discounted Cash outflows $ 7,835,500
Net Presnet Value = Total discounted cash inflows i.e $ 10,537,500 less Total discounted cash outflows i.e 7,835,500 = $ 2,702,000, approxiamtely $ 2.70 million
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