Question

The Horizon Company will invest $60,000 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 Flowyear 1- $ 15,000year 2- 25,000year 3- 40,000The 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 10 percent. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)Net present value $- b. Should the investment be undertaken?YesNo

Answer 1

Answer:

$ -3,163.04

No

Explanation:

The net present value is the present value of after tax cash flows from an investment to the amount invested.

The NPV can be found using a financial calculator:

Cash flow in year 0 = -$60,000

Cash flow in year 1- $ 15,000

Cash flow in year 2- $25,000

Cash flow in year  3- $40,000 - $10,000 = $30,000

I = 10%

NPV = $-3,163.04

The project should not be embarked upon because the cost of the project is greater than the present value of the after tax cash flows. The NPV is negative.

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you