Question

ments Sunshine company is having a proposal to enter in new venture with initiale 900,000 The expected cash flow for the next 5 years are as follows Year Cash flow (5) 200,000 370,000 350.000 448,000 Required: A. Calculate NPV, if required rate of return is 14%. Year Cash Flow PV en (10 marks) (2 m B. Should company accept or reject project and why? C Write down one advantage of NPV?

Answer 1

A. NPV($)

Year	Cashflow	PV if r & n $\frac{1}{1.14^n}$	Present value
0	(9,00,000)	1	(9,00,000)
1	2,00,000	0.8772	1,75,440
2	3,70,000	0.7695	2,84,715
3	3,50,000	0.675	2,36,250
4	4,48,000	0.5921	2,65,261
NPV			61,666

B. The company should accept the project as the NPV of the project is positive $61,666

C. The advantages of NPV is that it considers future cashflows at its present value by discounting the cashflows with appropriate discounting rate. This ensures comparability of cash inflows and outflows in different years.