Question

Several companies, including barnyard and energy solutions corporation, are considering project a, which is believed by all to have a level of risk that is equal to that of the average-risk project at barnyard. project a is a project that would require an initial investment of $76,400 and then produce an expected cash flow of $105,100 in 4 years. project a has an internal rate of return of 7.78 percent. the weighted-average cost of capital for barnyard is 10.13 percent and the weighted-average cost of capital for energy solutions corporation is 5.49 percent. what is the npv that energy solutions corporation would compute for project a?

a.3593.53
b.151995.53
c.7715.67
d.11571.11

Answer 1

To calculate the NPV for Project A for Energy Solutions Corporation, the present value of the future cash flow is computed using the WACC of 5.49% and then the initial investment is subtracted from this value, resulting in an NPV of $8,860.87.

Step-by-step explanation:

The student is asking how to calculate the Net Present Value (NPV) of Project A for Energy Solutions Corporation, given that the project has an expected cash flow of $105,100 in 4 years, an initial investment of $76,400, and Energy Solutions Corporation's weighted-average cost of capital (WACC) is 5.49%.

NPV can be calculated using the formula:

1. Find the present value (PV) of the future cash flow. This is done by dividing the future cash flow by (1 + r)^n, where 'r' is the discount rate (WACC in this case), and 'n' is the number of periods until the cash flow is received.
2. Subtract the initial investment from the PV of the expected cash flow to get the NPV.

Applying these steps:

1. PV = $105,100 / (1 + 0.0549)^4 = $105,100 / (1.0549)^4 = $105,100 / 1.232276 = $85,260.87 (Approx).
2. NPV = $85,260.87 - $76,400 = $8,860.87

The NPV for Energy Solutions Corporation for Project A is therefore $8,860.87, which doesn't match any of the multiple choice options provided in the question. There could be a mistake in the question or the options presented.