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Read the scenario. You are the financial manager of a firm that is contemplating investing $25,000 in a new project that...

Read the scenario.

You are the financial manager of a firm that is contemplating investing $25,000 in a new project that you expect will generate cash flows of $10,000 per year for five years and then $15,000 per year for another two years. At the end of seven years you expect to sell the project's assets for $50,000. You believe that you should earn at least 14% to compensate the shareholders for the project's risk.

  • What is the most that you should pay for this project?
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Answer #1

Amount to be paid is NPV of Project,

So,

NPV = -25,000 + 10,000/(1.14) + 10,000/(1.14)2 + 10,000/(1.14)3 + 10,000/(1.14)4 + 10,000/(1.14)5 + 15,000/(1.14)6 + 65,000/(1.14)7

NPV = $42,141

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