Question

The Wombat Resort is redoing its golf course at a cost of $2,744,320. It expects to generate cash flows of $1,223,445, 52,007,812, and $3,147,890 over the next three years. If the appropriate discount rate for the company is 13 percent, what is the NPV of this project? Select one: A. 57,581,072 B. $2,092.432 O C$4,836,752 O D. $3,112,459

Answer 1

Solution :

Question 1)

In order to calculate the NPV, we need to discount the future cash flow with the given discount rate of 13%

NPV = cash outflow + PV of cashflow in year 1 + PV of cashflow in year 2 + PV of cashflow in year 3

NPV = -2,744,320 + 1,223,445/(1+0.13)^1 + 2,007,812/(1+0.13)^2 + 3,147,890 / (1+0.13)^3

NPV = -2,744,320 + 1,223,445 / 1.13 + 2,007,812/1.2769 + 3,147,890/1.442897

NPV = -2,744,320 + 1,082,694.69 + 1,572,411.31 + 2,181,645.68 = 2,092,431.67 = 2,092,432

Option B is correct .

Question 2 )

We need to select the statement that is not correct.

In case of NPV

• If it is positive then it increases shareholders' wealth
• If it is negative then it decreases the shareholders' wealth
• If it is zero then managers are indifferent

So statement given in option B is not right as when NPV is negative then it will have an impact on shareholders' wealth and it will reduce shareholders' wealth.

Hence correct answer is option B