Question

A company has to make a decision about expanding its production facilities. Research indicates that the desired expansion would require an immediate outlay of $100,000 and an outlay of a further $40,000 in 4 years. The net cash returns are shown below. Find the net present value of the project. According to the net present value criterion, should the expansion project be undertaken if the required rate of return is 5%? Year 1 to Year 7 $17.000 per year Year 8 to Year 12 $12,500 per year The net present value of the expansion project is $ (Round the final answer to the nearest dollar as needed. Round all intermediate values to six decimal places as needed) The project should be Enter your answer in the answer box

Answer 1

Given:

initial investment=$100000

investment after 4 years = $40000

Total investment= $140000

rate of return=r=5%=0.05

Year 1 to Year 7 Year 8 to Year 12 317.000 per year 312.500 per year

Formula:

$NPV=-C_0+\frac{C_1}{1+r}+\frac{C_2}{(1+r)^2}+...+\frac{C_t}{(1+r)^t}$

NPV=net present value

where C0 = Total investment

C=cash flow

r=rate of return

t=time

investment 140000 Year 1 2 3 4 5 6 Cash returns 17000 17000 17000 17000 17000 17000 17000 12500 12500 12500 12500 12500 C/(1+r)^t 16190.47619 15419.50113 14685.23918 13985.94207 13319.94483 12685.66174 12081.58261 8460.492025 8057.611453 7673.915669 7308.491114 6960.467727 7 8 9 10 11 12 Total 136829.3257 NPV -3170.674256

a)

NPV = 136829.325744 - 140000 = -3170.674256

b) As NPV is negative the project shpuld be rejected