Question

An auto-parts company is deciding whether to sponsor a racing team for a cost of $1 million. The sponsorship would last for three years and is expected to increase cash flows by $570,000 per year. If the discount rate is 6.9%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship?

A) $498,597

B) $747,896

C) $797,756

D) $847,615

Answer 1

A) $498,597

Step-by-step explanation:

In this question, we have to compute the net present value which is presented below:

As we know

Net present value = Present value of yearly cash inflows - initial cost or initial investment

where,

The Present value of yearly cash inflows would be

= Cash flows × PVIFA for 3 years at 6.9%

= $570,000 × 2.6291

= $1,498,587

Refer to the PVIFA table

So, the net present value would be

= $1,498,587 - $1,000,000

= $498,587

So, it gives the return of $498,587, so the company should go ahead with the sponsorship