Question

Several companies, including Green Forest Packaging and Red Royal Food, are considering project A, which is believed by all to have a level of risk that is equal to that of the average-risk project at Green Forest Packaging. Project A is a project that would require an initial investment of 4,959 dollars and then produce an expected cash flow of 9,029 dollars in 6 years. Project A has an internal rate of return of 10.5 percent. The weighted-average cost of capital for Green Forest Packaging is 9.59 percent and the weighted-average cost of capital for Red Royal Food is 11.44 percent. What is the NPV that Red Royal Food would compute for project A?

Answer 1

answer

	year 0	year 1	year2	year3	year 4	year 5	year 6
sales	-4959
cost of goods		1504	1505	1505	1505	1505	1505
	-4959	1504	1505	1505	1505	1505	1505
ROR	11.4%
NPV	$ 1,190.92
IRR	10.50%

The project has a postive NPV pf 1190.92 but IRR less than 11.4% since in case of contradicting results NPV Is given priority.

NPV is calculated using spreadsheets