Question

Electro Company is planning to develop a new electric motorcycle. It estimates that it will need to invest $30 million in equipment and facilities. Its management team estimates that the new motorcycle will generate a net cash flow of $5 million in year 1, $7 million in year 2, $10 million in year 3, $14 million in year 4, and $17 million in year 5. Assuming that Electro evaluates all investments using a 15% rate of return (i.e., discount rate), what is the NPV of this project? Should it proceed? Show your work, and explain the reasoning for your answer.

Answer 1

А YEAR CASHFLOW (in million) -30 o aut WNW UWN PVF @ 15% Present Value -30 0.8695652174.347826087 0.756143667 5.293005671 0.657516232 6.575162324 0.571753246 8.004545438 0.497176735 8.4520045 10 14 17 9 Part (a) NPV 2.6725 Million dollars 10 11 12 Part (b) Yes, proceed with the Project since the NPV is positive

AB D FORMULA USED YEAR CASHFLOW (in million) PVF @ 15% | Present Value -30 =1/(1.15^B3 =C3*D3 =1/(1.15)^B4 =C4*D4 =1/(1.15)^B5 =C5*D5 310 =1/(1.15)^B6 =C6*D6 4 14 =1/(1.15)^B7 =C7*D7 =1/(1.15)^B8 =C8*D8 9 Part (a) NPV =SUM(E3:E8)