Question

Stix Co. is considering a project with an initial cost of $4 million. The project will produce cash inflows of $1.5 million a year for five years. The firm uses the subjective approach to assign discount rates to projects. For this project, the subjective adjustment is 2% higher. The firm has a basic weighted average cost of capital of 6%. What is the net present value of the project

Answer 1

Answer:

Stix Co.

The net present value of the project is:

= $1,989,500.

Explanation:

a) Data and Calculations:

Initial cost of project = $4 million

Annual cash inflows from the project = $1.5 million

Project duration = 5 years

Subjective adjustment to the discount rates = 2% higher

Basic weighted average cost of capital = 6%

Discount rate = 8%

Present Value Annuity factor = 3.993 at 8% for 5 years

Present Value of cash inflows = $5,989,500 ($1,500,000 * 3.993)

Net Present Value (NPV) of the project = Present value of cash inflows Minus the Initial Project Cost

= $1,989,500 ($5,989,500 - $4,000,000)