Question

The executives of Garner-Wagner Inc. are considering a project that has an up-front cost of $3 million and is expected to produce a cash flow of $500,000 at the end of each of the next 5 years. The project's cost of capital is 10%. Refer to the data for Garner-Wagner Incorporated. Based on the above data, what is the project's net present value? a. −$1,104,607 b. $321,788 c. $105,999 d. −$875,203 e. −$1,312,456

Answer 1

Answer:

The projects net present value = −$1,104,607

Explanation:

The net present value is the sum of the present values of all expected cash-flows from t=0 to t=n

The equal cash-flows of $500,000 expected at the end of each year from year 1 to year 5 are an annuity whose present value is  calculated as follows:

PV of An Ordinary Annuity= $\frac{PMT[1-(1+i)^{-n} ] }{i}$

where PMT is the the equal payment cash inflow received at the end of each period

i is the project's cost of capital and

n  is the number of periods making the annuity

Therefore: Net Present value of this investment given a 10% project cost of capital is calculated as follows:

NPV=$- 3million + \frac{( 500,000*[1-(1+0.1)^{-5} ]) }{0.1}$=-$1,104,606