Question

Sports & Moreis considering the development of an e-commerce business. The company estimates that development will require an initial outlay of $350,000. Other cash flows are estimated as follows: Year 1: ($60,000) Year 2: $140,000 Year 3: $210,000 Year 4: $130,000 Assuming the company limits its analysis to four years due to economic uncertainties, determine the net present value of the e-commerce business. Should the company develop the e-commerce business if the required rate of return is 6 percent?

Answer 1

The net present value of the e-commerce business is -$1,800.07, and the company should not develop it.

Step-by-step explanation:

To determine the net present value (NPV) of the e-commerce business, we need to calculate the present value of the cash flows using the required rate of return. The present value (PV) can be calculated using the formula: PV = CF/(1+r)^n, where CF is the cash flow, r is the required rate of return, and n is the number of years.

Year 1: PV = (-$60,000)/(1+0.06)^1 = -$56,603.77

Year 2: PV = $140,000/(1+0.06)^2 = $125,301.20

Year 3: PV = $210,000/(1+0.06)^3 = $175,759.57

Year 4: PV = $130,000/(1+0.06)^4 = $103,935.93

Net Present Value (NPV) = PV of cash inflows - PV of cash outflows - Initial outlay

NPV = $125,301.20 + $175,759.57 + $103,935.93 - $56,603.77 - $350,000 = -$1,800.07

Since the NPV is negative, the company should not develop the e-commerce business.