Question

Cornell Enterprises is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that a project’s projected NPV can be negative, in which case it will be rejected. WACC: 8% Year 0 1 2 3 Cash Flow $-1050 $450 $460 $470 a) $106.93 b) $102.58 c) $112.94 d) $134.14

Answer 1

The NPV calculation for Cornell Enterprises' project was performed using the given WACC of 8% and the cash flows for years 0 to 3. The calculated NPV of $134.89 does not match any given options, suggesting a possible rounding error or miscalculation.

Step-by-step explanation:

The question is based on the concept of Net Present Value (NPV), which is a method used in capital budgeting to analyze the profitability of an investment or project. We are given the Weighted Average Cost of Capital (WACC) of 8% and cash flows for the years 0, 1, 2, and 3.

To find the project's NPV, we discount each of the project's cash flows back to its present value using the WACC and sum them all together. Here's the calculation step-by-step:

1. Calculate the present value (PV) of the cash flow for Year 1: $450 / (1 + 0.08)^1
2. Calculate the PV of the cash flow for Year 2: $460 / (1 + 0.08)^2
3. Calculate the PV of the cash flow for Year 3: $470 / (1 + 0.08)^3
4. Add all the PVs together and subtract the initial investment to get the NPV.

Performing these calculations:

• PV of Year 1 cash flow = $450 / 1.08 = $416.67
• PV of Year 2 cash flow = $460 / (1.08^2) = $394.27
• PV of Year 3 cash flow = $470 / (1.08^3) = $373.95
• NPV = $416.67 + $394.27 + $373.95 - $1050 = $134.89

None of the given options (a) $106.93, (b) $102.58, (c) $112.94, or (d) $134.14 match the calculated NPV of $134.89. Perhaps there has been a rounding error or a miscalculation;

however, based on these figures, the NPV would be closest to $134.89, which is not listed as an option.