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

Answer 1

$498,597.35

Step-by-step explanation:

For this question we have to determine the net present value which is shown below:

Year Cash flows Discount factor at 6.9% Present value

0 -$1000,000 1 -$1000,000 (A)

1 $570,000 0.935453695 $533,208.61

2 $570,000 0.8750736156 $498,791.96

3 $570,000 0.8185908471 $466,596.78

Total present value $1,498,597.35 (B)

Net present value $498,597.35 (A - B)