Question

The Horizon Company will invest $50,000 in a temporary project that will generate the following cash inflows for the next three years. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Year Cash Flow 1 $ 15,000 2 30,000 3 20,000 The firm will also be required to spend $10,000 to close down the project at the end of the three years. a. Compute the net present value if the cost of capital is 12 percent.

Answer 1

NPV = - $5,573.24

Step-by-step explanation:

We know,

Net Present value = ∑
`(Cashflow_(t))/((1 + r)^(t))` - Initial Cash flow

Given,

Cost of capital, r = 12% = 0.12

Initial cash flow = $50,000

number of year, t = 3

Therefore,

Present value of cash flows =
`(15,000)/((1 + 0.12)) + (30,000)/((1 + 0.12)^2) + (20,000)/((1 + 0.12)^3)`

Present value of cash flows =
`(15,000)/(1.12) + (30,000)/((1.12)^2) + (20,000)/((1.12)^3)`

Present value of cash flows =
`(15,000)/(1.12) + (30,000)/(1.2544) + (20,000)/(1.4049)`

Present value of cash flows = $13,392.8571 + $23,915.8163 + $14,235.8887

Present value of cash flows = $51,544.56

Present value of cash outflow = $50,000 + [10,000 ÷ (1.12)^3]

Present value of cash outflow = $50,000 + $7,117.80

Present value of cash outflow = $57,117.80

Therefore, NPV = $51,544.56 - $57,117.80

Net present value, NPV = - $5,573.24