Question

Aerospace dynamics will invest $125,000 in a project that will produce the following cash flows. the cost of capital is 11 percent. (note that the fourth year’s cash flow is negative.) use appendix b for an approximate answer but calculate your final answer using the formula and financial calculator methods. year cash flow 1 $ 41,000 2 50,000 3 43,000 4 (50,000) 5 92,000 what is the net present value of the project? note: negative amount should be indicated by a minus sign. do not round intermediate calculations and round your answer to 2 decimal places. should the project be undertaken? multiple choice yes no

Answer 1

The net present value of the project is $7,555.96. The project should be undertaken.

Step-by-step explanation:

To calculate the net present value (NPV) of the project, we need to discount each cash flow at the cost of capital and sum them up. The formula to calculate the present value of a cash flow is PV = CF / (1+r)^n, where PV is the present value, CF is the cash flow, r is the discount rate, and n is the number of years. Applying this formula to the cash flows provided and discounting them at 11 percent, we get:

1. Year 1: $41,000 / (1+0.11)¹ = $36,936.94
2. Year 2: $50,000 / (1+0.11)² = $39,340.18
3. Year 3: $43,000 / (1+0.11)³ = $31,271.93
4. Year 4: ($50,000) / (1+0.11)⁴ = ($33,661.73)
5. Year 5: $92,000 / (1+0.11)⁵ = $58,668.64

Next, we sum up these present values: $36,936.94 + $39,340.18 + $31,271.93 + ($33,661.73) + $58,668.64 = $132,555.96. The net present value is the sum of the present values minus the initial investment, which is $132,555.96 - $125,000 = $7,555.96. Hence, the net present value of the project is $7,555.96.

Considering the net present value is positive, the project should be undertaken as it is expected to generate a positive return.

Answer 2

To calculate the net present value (NPV) of the project, discount each cash flow to its present value using the cost of capital (11%). Then, sum up the discounted cash flows to find the NPV. In this case, the NPV is $135,854.97, indicating that the project should be undertaken.

Step-by-step explanation:

To calculate the net present value (NPV) of the project, we need to discount each cash flow to its present value. Here are the steps:

1. Discount the cash flows using the formula NPV = CF₁/(1+r)¹ + CF₂/(1+r)² + ... + CFn/(1+r)ⁿ, where CF is the cash flow and r is the cost of capital (11% in this case).
2. Calculate the NPV by summing up the discounted cash flows.

Let's calculate the NPV:

• Year 1: $41,000 / (1+0.11)¹ = $36,936.94
• Year 2: $50,000 / (1+0.11)² = $40,732.96
• Year 3: $43,000 / (1+0.11)³ = $32,421.78
• Year 4: ($50,000) / (1+0.11)⁴ = ($33,702.70)
• Year 5: $92,000 / (1+0.11)⁵ = $58,464.99

Now, summing up the discounted cash flows:

NPV = $36,936.94 + $40,732.96 + $32,421.78 - $33,702.70 + $58,464.99 = $135,854.97 (rounded to 2 decimal places)

Since the NPV is positive, the project should be undertaken.