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Ahmed Company is considering investing in a new project
Ahmed Company is considering investing in a new project. The project will need an initial investment of OMR 3,000 and will generate OMR 1,000 (after- tax) cash flows for five years. If the cost of capital is 8.5 percent. Based on the NPV, Ahmed will accept the project Select one: True False
Expert Solution
Answer- True. Ahmed will accept the project.
Calculation of NPV
|
Year |
Cash Flow (in $) (i) |
Discounting Factor @ 8.5% (ii) |
Discounted Cash Flow (i)* (ii) |
|
0 |
(3,000) |
1 |
(3,000) |
|
1 |
1,000 |
0.9216 |
921.6 |
|
2 |
1,000 |
0.8494 |
849.4 |
|
3 |
1,000 |
0.7829 |
782.9 |
|
4 |
1,000 |
0.7215 |
721.5 |
|
5 |
1,000 |
0.6650 |
665 |
|
SUM: |
3,940.4 |
NPV = Present Value of Cash Outflows - Present Value of Cash Inflows
= 3,940.4 – 3,000
NPV = $ 940.4
Conclusion- Since, the project generates a positive NPV of $ 940.4; therefore, Ahmed will accept the project.
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