Question

An auto-parts company is deciding whether to sponsor a racing team for a cost of $1 million. The sponsorship would last for three years and is expected to increase cash flows by $570,000 per year. If the discount rate is 6.9 %, what will be the change in the value of the company if it chooses to go ahead with the sponsorship?A) $747,896B) $797,756C) $847,615D) $498,597

Answer 1

$498,597

Step-by-step explanation:

The company's' worth would be increased by as much as the net present value of the sponsorship.

We calculate the Present value of cash flows @ 6.9%

Year 1 = 570,000 * (1/1+0.069) = 533,209 (rounded)

Year 2 = 570,000 * (1/(1+0.069)^2) = 498,792 (rounded)

Year 3 = 570,000 * (1/(1+0.069)^3) = 466,597 (rounded)

NPV = (533209 + 498792 + 466,597) - 1,000,000

NPV = $498,598

This is the net increase in value of the company.

Hope that helps.