In: Finance
You are considering an investment in a new sub-industry of interest to your firm. The project requires an initial outlay of $200,000. In addition, after-tax cash flows for years one through six will be $25,000 per year. The appropriate discount rate for this project is 12 percent. Your firm is not interested to continue with this project after the 6thyear, therefore, at the end of the project’s life, the firm is expected to liquidated this project and receive an addition after-tax inflow of $65,000. Will you accept or reject this project?
Solution :
The Net Present value of the investment in a new sub-industry is = - $ 64,283.79
Since the NPV of the investment is negative, the project should be rejected.
Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.