Question

An auto-parts company is deciding whether to sponsor a racing team for a cost of $500000. The sponsorship would last for 5 years and is expected to increase cash flows by $150000 per year. If the discount rate is 7%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship

Answer 1

$115,029.61

Step-by-step explanation

From the question given, we apply the Net Present Value (NPV) formula:

NPV = -Co + C1/(1 + r) + C2/(1 + r)^2 +....+ Ct/(1 + r)^t

Where the values are stated below:

Co = the initial investment

C = the cash flow

r = the discount rate

t = time

so,

NPV = -500,000 + 150,000/(1 + 0.07 ) + 150,000 / (1 + 0.07 )^2 + 150,000/ (1 + 0.07)^3 + 150,000 / (1 + 0.07 )^4 + 150,000 / (1 + 0.07 )^5

= -500,000 + 140,186.91 + 131,015.81 + 122,444.68 + 114,434.28 + 106,947.93

= $115,029.61

The change of value of the company if it chooses to go ahead with the sponsorship is $115,029.61

Answer 2

Answer: The answer is $115,029.61

Explanation: We will be calculating this question using the Net Present Value (NPV) formula, thus:

NPV = -Co + C1/(1 + r) + C2/(1 + r)^2 +....+ Ct/(1 + r)^t

Where:

Co = initial investment

C = cashflow

r = discount rate

t = time

NPV = -500,000 + 150,000/(1 + 0.07 ) + 150,000 / (1 + 0.07 )^2 + 150,000/ (1 + 0.07)^3 + 150,000 / (1 + 0.07 )^4 + 150,000 / (1 + 0.07 )^5

= -500,000 + 140,186.91 + 131,015.81 + 122,444.68 + 114,434.28 + 106,947.93

= $115,029.61