Question

Read the scenario. You are the financial manager of a firm that is contemplating investing in a new project that you expect will generate cash flows of $10,000 per year for five years and then $15,000 per year for another two years. At the end of seven years you expect to sell the project's assets for $50,000. You believe that you should earn at least 14% to compensate the shareholders for the project's risk. Answer the questions. Answer the following questions: • Explain the process for evaluating this project. • What is the present value of the project's terminal value? • What is the most that you should pay for this project? • Is this project consistent with the firm's goal assuming you can invest $25,000 in this project? • What is the primary goal of the firm?

Answer 1

Year / I Cash flows - $25,000 $10,000 1 * $ 10,000 $10,000 pr@ 141. I discounted cash flows 1.0000 - $25,000.00 0.8722 $8,772.93 0.7695 $7,694.68 O. 6750 $ 6,749. 72 0.5921 $5,920.80 0.5194 $5, 193.69 0 4556 $6,833.80 0. 3996 | $ 25,976.43 $ 42,141 03 $10,000 L $ 10,000 $ 15,000 $ 65,000 NPV ] Profitability Index = 1+ NPV+ Initial Investment [ 2.69 - 1+ (4214 1.03/25000) = 2.69