Question

A company is in the process of constructing a new plant at a cost of $20 million. It expects the project to generate cash flows of 58 million $6 million and 511 million over the next three years. The cost of capital is 18.2 percent pa. What is the net present value of this project? (in millions to three decimals) Select one a. 5-2.276 O b. $37.724 Oc$-5.005 d. 5-1.495

Answer 1

Question 1)

Answer: Option A: -$2.276

Given

initial investment I=$20

Cash flow for first year CF1=$8

Cash flow for Second year CF2=$6

Cash flow for Third year CF3=$11

Cost of Capital r=18.2%

So Net Present value=CF1/(1+r) +CF2/(1+r)^2+CF3/(1+r)^3-I=8/(1+18.2%)+6/(1+18.2%)^2+11/(1+18.2%)^3-20=-$2.276