Hi! I could use help answering qustions 1-5. I am counfused on how to calculate

Question

Hi! I could use help answering qustions 1-5. I am counfused on how to calculate NPV. I will leave a great review!

Financial Options: NPV Exercise David and Jennifer are looking to buy an existing business that's for sale. They found two stores that intrigue them. Let's call them Store A and Store B Both stores are for sale at the same price, $1.5 million. The uncertainty David and Jennifer are facing is the health of the economy. They researched the economic forecasts and believe that there is a 65% chance the economy will remain strong and a 35% chance that the economy may slip into a recession. If the economy does go into a recession, their expected sales will decrease. They must pay $1.5 million now (Year 0) to purchase either store. Their cost of capital is 15.0%.

Explanation / Answer

First of all just calculate the PV of cashflow of store B at a discount rate of 15% for 5 years if the economy is strong.

As per my calculation the PV of Cashflow is $ 1080337.55(a)

Now the Salvage Value will be Sales Value * PVIF at end of 6th year which will be $ 648491.39 (b)

So the total cash Inflow is (a) + (b) i.e. $ 1728828.94.

Initial Outflow (Cost of Asset) = $ 1500000.

1. NPV = 1728828.94 - 1500000 = $ 228828.94.

2. If there is recession then the cash inflow would be 55% of (a) i.e. 1728828.94 * 55% = $950855.92.

Hence the NPV woul be negative which is $(549144.083).

I hope that your doubt of NPV is solved, Now you can use the above cash inflow to solve the other 3 questions.

Please let me know that it is helpful or not.

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