Question

Bridgewater Fountains is considering expanding its current line of business and has developed the following expected cash flows for the project. Should this project be accepted if the required return is 9.6 percent? Why or why not? You must calculate NPV and IRR for each problem, using the NPV and IRR functions in the Excel spreadsheet program. Provide a basic description of the answers for each problem.

Year Cash Flow

0) -$487,900

1 ) 187,200

2) 229,900

3) -27,300

4 ) 246,800

Answer 1

Solution:

2 Computation of NPV - Bridgewater Fountains Computation of IRIR PV Factor Particulars Amount Present Value Period Cash flows IRR 9.6% Cash Flows: Year 0 Year 1 Year 2 Year 3 Year 4 $487,900.00 $187,200.00 $229,900.00| $27,300.00 $246,800.00 0 1.00000 -$487,900.00 0.91241 $187,200.00 0.83249 $229,900.00 0.75957-$27,300.00 0.69304 $246,800.00 $487,900 $170,803 $191,389 $20,736 $171,042 12.0% 4 10 Net Present Value $24,598 12 13

2 Computation of NPV - Bridgewater Fountains Computation of IRIR Particulars PV Factor (9.6%) | Amount | Present Value Period Cash flowsIRR Cash Flows: Year 0 Year 1 Year 2 Year 3 Year 4 4 -487900 -487900 C5*D5 187200 -C6 D6 229900 C7 D7 27300 C8*D8 246800 C9 D9 187200 C5/1.096 -C6/1.096 C7/1.096 C8/1.096 27300 4 246800 IRR(14:18 10 Net Present Value -SUM(E5:E10 12

As NPV is positive and IRR is higher than required rate of return, therefore this project should be accepted.