Question

Twelve Inch Toes Corp. will invest $205,000 in a project that will not begin to produce returns until the third year. From the end of the third year until the end of the tenth year (8 periods), the annual cash flow will be $53,000.

a. Calculate the net present value if the cost of capital is 12 percent. (Use a Financial calculator to arrive at the answers. Do not round intermediate calculations. Round the final answer to the nearest whole dollar. Negative answer should be indicated by a minus sign.)

Net present value           $

b. Should the project be undertaken?

• Yes

• No

Answer 1

a)
	Year	Cash Flow	PV Factor At 12%	PV of cash flows
	0	$         -2,05,000	1	$         -2,05,000
	3	$              53,000	0.71178	$              37,724
	4	$              53,000	0.635518	$              33,682
	5	$              53,000	0.567427	$              30,074
	6	$              53,000	0.506631	$              26,851
	7	$              53,000	0.452349	$              23,975
	8	$              53,000	0.403883	$              21,406
	9	$              53,000	0.36061	$              19,112
	10	$              53,000	0.321973	$              17,065
		NPV		$                 4,889
		Net present value   =$4889
b)	Since, the NPV is positive, the project should be undertaken.