The Horizon Company will invest $88,000 in a temporary project that will generat

Question

The Horizon Company will invest $88,000 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 $ 24,000 2 32,000 3 61,000 The firm will also be required to spend $12,000 to close down the project at the end of the three years. a. Compute the net present value if the cost of capital is 8 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?

Explanation / Answer

Answer:

Horizon Company

Present Value of Inflows

Year          Cash Flow    × PVIF at 8%    Present Value

1               $24,000                .926                    $22224

2                 32,000                .857                       27424

3                 61,000                .794                      48434

                                                                                                $98082

Present Value of Outflows

0               $88,000              1.000                   $88,000

3                 12,000                .794                        9526

                                                                            $97526

Present Value of inflows                   $98082

Present Value of outflows                  97526

Net present value                                    $556

The net present value is positive and the project should be undertaken.

Note, the $12,000 outflow could have been subtracted out of the $61,000 inflow in the third year and the same answer would result.

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