Question

A firm is considering an investment in a new advertising project. The project will produce a cash flow of $1,000 in one year and it will produce a cash flow of $15,000 two years from now. The firm has a required return of 11%. You are the manager of the advertising department and you estimate that the cost of this project is $13,000 today. Do you recommend that the firm accept this project

Answer 1

The fact the investment opportunity has a positive cash flow means that the project should be accepted since it is value-adding

Step-by-step explanation:

We can evaluate the acceptability of the project using the net present value approach. The net present value is the present value of future cash flows discounted at the 11% required rate of return.

Present value=future cash flow/(1+required rate of return)^n

n is the year in which the cash flows are expected, it is 1 for year 1 cash flow and 2 for year 2 cash flow

NPV=$1,000/(1+11%)^1+$15,000/(1+11%)^2-$13,000

NPV=$75.24