Question

Wansley Lumber is considering the purchase of a paper company. Purchasing the company would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each year for the next 20 years. The cost of capital for the paper company is 13%.
a. Should Wansley purchase the paper company?

Answer 1

Answer:

a. NO

Explanation:

In this question we have to find out the net preset value which is shown below:

= Present value of all annual cash inflows after implementation of discount factor - initial investment  

where,  

The Initial investment is $300 million

All yearly cash flows would be

= Annual net cash flows × PVIFA for 20 years at 13%  

= $40 million  × 7.0248

= $280.992 million

Refer to the PVIFA table

So, the net present value would be

= $280.992 million - $300 million

= -$19.008 million

Since the net present value comes in negative, so the wansley should not purchase the paper company