Question

DISCOUNT CASH FLOW AND NPV [3 POINTS Your firm is trying to decide whether to invest in a project opportunity based on the following information. The initial cash outlay will total $240,000 over two years. The firm expects to invest $200,000 immediately and the final $40,000 in one year's time. The company predicts that the project will generate a stream of earnings of $55,000, $105,000, $200,000, and $75,000 per year, respectively, starting in Year 2. The required rate of return is 11%. Should you invest in this project? Justify your answer. Show all your work by filling in the remaining cells. Year 1 Inflows Outflows Net Flow Discount Factor 1.0000 $0 $200 $200,000 $(200,000) $0 $40,000 $(40,000) $55,000 $105,000 $200,000 $75,000 Total $435,000 $240,000

Answer 1

Correct Answer:

Net present value = $ 61,630.50

year	inflows	outflows	Net flow	discount factor	NPV
0	$                   -	$ 200,000.00	$ (200,000.00)	1.0000	$ (200,000.00)
1	$                   -	$    40,000.00	$ (40,000.00)	0.9009	$    (36,036.00)
2	$    55,000.00			0.8116	$      44,638.00
3	$ 105,000.00			0.7312	$      76,776.00
4	$ 200,000.00			0.6587	$    131,740.00
5	$    75,000.00			0.5935	$      44,512.50
Total	$ 435,000.00	$ 240,000.00			$      61,630.50

You should invest in this project, since the net present value of this project is positive at the discount rate of 11%.

End of answer.

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