Question

Weghorst Co. is considering a three-year project that will require an initial investment of $45,000. It has estimated that the annual cash flows for the project under good conditions will be $60,000 and $10,000 under bad conditions. The firm believes that there is a 60% chance of good conditions and a 40% chance of bad conditions.

If the firm is using a weighted average cost of capital of 8.0000%, what will be the expected net present value (NPV) of the project?
a) $58,084
b) $37,755
c) $31,946
d) $40,659

Answer 1

a) $58,084

Step-by-step explanation:

The computation of the net present value is shown below:

But before that first we need to determine the annual cash flows which is

= $60,000 × 0.60 + $10,000 × 0.40

= $36,000 + $4,000

= $40,000

Now the net present value is

= Present value after considering the discount factor - initial investment

= Annual cash flows × PVIFA factor at 8% for 3 years - $45,000

= $40,000 × 2.5771 - $45,000

= $58,084