Question

The Horizon Company will invest $50,000 in a temporary project that will generate the following cash inflows for the next three years. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Year Cash Flow 1 $ 15,000 2 30,000 3 20,000 The firm will also be required to spend $10,000 to close down the project at the end of the three years. a. Compute the net present value if the cost of capital is 12 percent.

Answer 1

Answer:

NPV = - $5,573.24

Explanation:

We know,

Net Present value = ∑$\frac{Cashflow_{t}}{(1 + r)^{t}}$ - Initial Cash flow

Given,

Cost of capital, r = 12% = 0.12

Initial cash flow = $50,000

number of year, t = 3

Therefore,

Present value of cash flows = $\frac{15,000}{(1 + 0.12)} + \frac{30,000}{(1 + 0.12)^2} + \frac{20,000}{(1 + 0.12)^3}$

Present value of cash flows = $\frac{15,000}{1.12} + \frac{30,000}{(1.12)^2} + \frac{20,000}{(1.12)^3}$

Present value of cash flows = $\frac{15,000}{1.12} + \frac{30,000}{1.2544} + \frac{20,000}{1.4049}$

Present value of cash flows = $13,392.8571 + $23,915.8163 + $14,235.8887

Present value of cash flows = $51,544.56

Present value of cash outflow = $50,000 + [10,000 ÷ (1.12)^3]

Present value of cash outflow = $50,000 + $7,117.80

Present value of cash outflow = $57,117.80

Therefore, NPV = $51,544.56 - $57,117.80

Net present value, NPV = - $5,573.24