Question

Lithium, Inc. is considering two mutually exclusive projects, X and Y. Project X costs $95,000 today (year 0) and is expected to generate $65,000 in year one and $75,000 in year two. Project Y costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. The firm's investors require a rate of return of 16% and the weighted average cost of capital is 13%. What is the net present value for Project Y

Answer 1

$52,521

Step-by-step explanation:

As per Given Data

Project Y

Costs $120,000

Cash Inflows

Year 1 $64,000

Year 2 $67,000

Year 3 $56,000

Year 4 $45,000

Required rate of return = 16%

Weighted Average cost of Capital = 13%

Net Present Value

As we know Net Present value is calculated by discounting each years cash flows using using the Weighted Average cost of Capital.

Costs $120,000

Year Cash Inflows Discount factor 13% Present values

Year 0 $(120,000) (1+13%)^-0 $(120,000)

Year 1 $64,000 (1+13%)^-1 $56,640

Year 2 $67,000 (1+13%)^-2 $52,471

Year 3 $56,000 (1+13%)^-3 $38,811

Year 4 $45,000 (1+13%)^-4 $27,599

Net present value $52,521