Question

Snowbound Tours is considering investing $5,650,000 in a new lodge on the Tanana River. Management projects 15 years of cash flows per the chart below. Using a discount rate of 9.65%, management should:_______.

Year Cash Flow Year Cash Flow
1 260,000 9 980,000
2 340,000 10 965,000
3 505,000 11 920,000
4 610,000 12 890,000
5 790,000 13 840,000
6 1,200,000 14 720,000
7 1,295,000 15 690,000
8 1,110,000
A. Accept the project
B. Reject the project
C. Be indifferent to the project

Answer 1

A. Accept the project

Step-by-step explanation:

For deciding whether the project should be accepted or rejected we need to determine the net present value

Year cash flows PV factor at 9.65% Present value

0 -$5,650,000 1 -$5,650,000

1 $260,000 0.9120 $237,118.10

2 $340,000 0.8317 $282,788.44

3 $505,000 0.7585 $383.058.82

4 $610,000 0.6918 $421,983.33

5 $790,000 0.6309 $498,406.75

6 $1,200,000 0.5754 $690,445.54

7 $1,295,000 0.5247 $679,531.07

8 $1,110,000 0.4786 $531,194.89

9 $980,000 0.4364 $427,708.96

10 $965,000 0.3980 $384,097.03

11 $920,000 0.3630 $333,958.75

12 $890,000 0.3311 $294,636.38

13 $840,000 0.3019 $253,610.38

14 $720,000 0.2753 $198,249.27

15 $690,000 0.2511 $173,268.47

Net present value $140,056.19

Since the net present value comes in positive so the project should be accepted