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Homework answers / question archive / Assume that Leo has a new venture that costs $100,000

Assume that Leo has a new venture that costs $100,000

Finance

Assume that Leo has a new venture that costs $100,000. The company expects to have cash flows of $40,000 per year for the first four years and $50,000 in year 5. There will be no salvage value and the company’s cost of capital is 9.23%. Based on this data, calculate the NPV and decide if you would accept the project using the NPV method?

Hint: You accept a project if NPV is positive. NPV = Present value of future cash flows minus initial investment

Question 5 options:

 

$61,093; accept

 

$75,120; accept

 

$89.098; reject

 

-$2096; reject

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Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=40,000/1.0923+40,000/1.0923^2+40,000/1.0923^3+40,000/1.0923^4+50,000/1.0923^5

=161093.14

NPV=Present value of inflows-Present value of outflows

=161093.14-100,000

=$61093(Approx)

Hence since NPV is positive;project must be accepted.

Hence the correct option is:

$61093;accept

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