Question

Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the net present value of this project

Answer 1

Answer:

The net present value of this project is $13,587,962.96

Explanation:

The Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows  from a decision. A positive NPV indicates a profitable investment and a negative the opposite.

We can be work out the NPV of Turnbull Corp as follows

                                                            Present Value

Year 1       13000,000× *(1.2^(-1)  = 10,833,333.3

Year 2     23,000,000 × 1.2^(-2) =   15,972,222.22

Year 3    29,000,000 ×  1.2^( -3) =   16,782,407.41

Total PV of cash inflows                   43,587,963.0

Less the PV of cash outflow              (30,000,000)

Net Present Value (NPV)                 13,587,962.96

       

The net present value of this project is $13,587,962.96

Answer 2

Answer: Net present value = $13,587,962.96

Explanation: Net Present Value (NPV) is the summation of all the discounted cash flow less the initial capital outlay. Net Present Value is used in making decision on a project to reject or accept it. A Project with positive NPV is accepted while a project with negative NPV is rejected

In arriving at the NPV, calculate the discounted cash flow using the discount rate of 20%

Year 0 = (30,000,000)

Year 1 = 10,833,333.33

Year 2 = 15,972,222.22

Year 3 = 16,782,407.41

Net present value is equal to $13,587,962.96

This project has a positive NPV as such it should be accepted.