Question

If Happy Dog Soap found that this project would reduce one of its division's net after-tax cash flows by $400 for each year of the four-year project, how much should Happy Dog Soap reduce the NPV of this project?

A) $931
B) $745
C) $1,365
D) $1,241

Answer 1

To calculate the reduction in NPV (Net Present Value) of the project due to the decrease in net after-tax cash flows, we need to determine the present value of the $400 reduction in cash flows for each of the four years. Assuming a discount rate of 10%, the reduction in NPV is $1,268.96.

Step-by-step explanation:

To calculate the reduction in NPV (Net Present Value) of the project due to the decrease in net after-tax cash flows, we need to determine the present value of the $400 reduction in cash flows for each of the four years. To do this, we use the present value formula:

Present Value = Cash Flow / (1 + r)n

Here, r is the discount rate and n is the number of years.

Let's assume a discount rate of 10%. Calculating the present value for each year:

1. Year 1: $400 / (1 + 0.10)1 = $363.64
2. Year 2: $400 / (1 + 0.10)2 = $330.58
3. Year 3: $400 / (1 + 0.10)3 = $300.53
4. Year 4: $400 / (1 + 0.10)4 = $273.21

To calculate the reduction in NPV, we sum up the present values:

$363.64 + $330.58 + $300.53 + $273.21 = $1,268.96

Therefore, the reduction in NPV of this project is $1,268.96. None of the given options match this amount, so none of the provided answer choices are correct.