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Assume that Leo has a new venture that costs $100,000
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 |
|
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-$2096; reject |
Expert Solution
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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