Question

Orange Valley, which currently operates a(n) climbing wall, is considering project A, which would involve opening a(n) ice cream parlor. For most of its existence, Orange Valley has operated a(n) climbing wall, ice cream parlor, and skating rink. Project A would require an initial investment of 6,263 dollars and is expected to produce annual cash flows of 820 dollars each year forever with the first annual cash flow expected in 1 year. What is the NPV of project A, based on the information in this paragraph and the following table and applying the pure play approach to determining a project’s cost of capital?

Firm	Line of business	WACC
Orange Valley	climbing wall	10.2 percent
Violet Sky	skating rink	6.69 percent
Green Forest	ice cream parlor	11.86 percent
Indigo River	climbing wall, ice cream parlor, and skating rink	8.35 percent

Answer 1

NPV of Project A based on applying the pure play approach to determine the project's cost of capital=-6263+820/11.86%
=650.9966