Question

Your firm is considering opening a branch office in Kyle. The office would cost $485,000 to build the office. During the office is expected to generate cash flows of $45,000 during the first year of operation, $120,000 the second year, then reach a steady cash flow of $150,000 per year for the next three years. If your required return is 16%, should you open the branch office?

Answer 1

Year	Cash flow	× discount rate	Present value
0	$      (485,000)	1.0000	$          (485,000.00)
1	$          45,000	0.8621	$             38,793.10
2	$        120,000	0.7432	$             89,179.55
3	$        150,000	0.6407	$             96,098.65
4	$        150,000	0.5523	$             82,843.66
5	$        150,000	0.4761	$             71,416.95
NPV			$          (106,668.08)

As NPV is negative branch office should not be opened.

Please rate.