A number of companies, including Litchfield Design and Oxygen Optimization, are

Question

A number of companies, including Litchfield Design and Oxygen Optimization, are considering undertaking project A, which is believed by all to have a level of risk that is equal to that of the average-risk project at Litchfield Design. Project A is a project that would require an initial investment of 5,885 dollars and then produce an expected cash flow of 12,272 dollars in 8 years. Project A has an internal rate of return of 9.622 percent. The weighted-average cost of capital for Litchfield Design is 10.48 percent and the weighted-average cost of capital for Oxygen Optimization is 11.55 percent. What is the NPV that Oxygen Optimization would compute for project A?

Explanation / Answer

First of all Note that we will use the WACC of Litchfield Design as the Risk is similar to the Risk at Litchfield Design.

Thus NPV = - 5885 + 12272/1.10488 = - 5885 + 5528.993 = - 356. 01 dollars

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