Question

Read the scenario.

You are the financial manager of a firm that is contemplating investing $25,000 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.

• Is this project consistent with the firm's goal assuming you can invest $25,000 in this project?

Answer 1

The NPV will be computed as shown below:

= - $ 25,000 + $ 10,000 / 1.14¹ + $ 10,000 / 1.14² + $ 10,000 / 1.14³ + $ 10,000 / 1.14⁴ + $ 10,000 / 1.14⁵ + $ 15,000 / 1.14⁶ + $ 15,000 / 1.14⁷ + $ 50,000 / 1.14⁷

= $ 42,141.03

Since the NPV is positive, hence the project is consistent with the firm's goal assuming you can invest $25,000 in this project

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