Macy Pharmacy has a project which has the following cash flows. Year 0 = -$200,0
ID: 2823585 • Letter: M
Question
Macy Pharmacy has a project which has the following cash flows.
Year 0 = -$200,000
Year 1 = $50,000
Year 2 = $100,000
Year 3 = $150,000
Year 4 = $40,000
Year 5 = $25,000
The initial cost of capital is 10%. The financial manager wants to see what happens to the project's net present value if the cost of capital were increased to 12%.
the NPV would increase by 2%
the NPV would increase by 15%
the NPV would decrease by 2%
the NPV would decrease by 15%
the NPV would increase by 2%
the NPV would increase by 15%
the NPV would decrease by 2%
the NPV would decrease by 15%
Explanation / Answer
Calculation of NPV Statement showing Cash flows Particulars Time PVf 10% Amount($) PV Cash Outflows - 1.00 -2,00,000.00 -2,00,000.00 PV of Cash outflows = PVCO -2,00,000.00 Cash inflows 1.00 0.9091 50,000.00 45,454.55 Cash inflows 2.00 0.8264 1,00,000.00 82,644.63 Cash inflows 3.00 0.7513 1,50,000.00 1,12,697.22 Cash inflows 4.00 0.6830 40,000.00 27,320.54 Cash inflows 5.00 0.6209 25,000.00 15,523.03 PV of Cash Inflows =PVCI 2,83,639.96 NPV= PVCI - PVCO 83,639.96 Statement showing Cash flows Particulars Time PVf 12% Amount($) PV Cash Outflows - 1.00 -2,00,000.00 -2,00,000.00 PV of Cash outflows = PVCO -2,00,000.00 Cash inflows 1.00 0.8929 50,000.00 44,642.86 Cash inflows 2.00 0.7972 1,00,000.00 79,719.39 Cash inflows 3.00 0.7118 1,50,000.00 1,06,767.04 Cash inflows 4.00 0.6355 40,000.00 25,420.72 Cash inflows 5.00 0.5674 25,000.00 14,185.67 PV of Cash Inflows =PVCI 2,70,735.68 NPV= PVCI - PVCO 70,735.68 Percentage change in NPV= (70735.68-83639.96)/83639.96*100= -12904.3/83639.96*100= -15.42% So correct answer is The NPV would decrease by 15%
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