Question

Crystal Industries is considering an expansion project with cash flows of -$325,000, $167,500, $216,100, $104,500, and -$92,700 for years 0 through 4. Should the firm proceed with the expansion based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent

Answer 1

Crystal Industries

NPV = $7,1005.51

The firm should proceed with the expansion because the project will yield a positive net present value.

Step-by-step explanation:

a) Data and Calculations:

Discount rate = 13.4%

Discount factor = 1/(1 + r)∧n

Calculation of the Net Present Value:

Years Cash flows Discount Factor Present value

0 -$325,000 1 -$325,000.00

1 $167,500 0.8818 147,701.50

2 $216,100 0.7776 168,039.36

3 $104,500 0.7001 73,160.45

4 -$92,700 0.6174 -56,800.80

NPV = $7,100.51

b) Crystal's net present value (NPV) is the difference between the present value of its cash inflows and the present value of its cash outflows over the project's 4 years. The NPV is usually determined in capital budgeting and investment planning as a financial evaluation tool when analyzing the positivity of a project's cash flows. It discounts the future cash flows to today's dollar values, taking into consideration the time value of money.