In: Finance
CORRECTED. YEARS 0-4. (NO 5).
RiverRocks, Inc., is considering a project with the following
projected free cash flows:
Year 0 1 2 3 4
Cash Flow (in millions)
Yr 0 negative $ 50.0 Yr 1 $ 10.0 Yr 2 $ 20.0 Yr 3 $ 20.0 Yr 4 $
15.0
The firm believes that, given the risk of this project, the WACC method is the appropriate approach to valuing the project. RiverRocks' WACC is 12.0 %. Should it take on this project? Why or why not?
The net present value of the project is $ ____ million. (Round to three decimal places.)
No, RiverRocks should not take on this project as the NPV is negative and hence the project is not financially feasible.
The net present value of the project is - $1.359 million.
Calculations:
Year (n) | Cash flow | 1+r | PVIF = 1/(1+r)^n | PV = Cash flow * PVIF |
0 | - 50.00 | 1.12 | 1.00000 | - 50.00 |
1 | 10.00 | 0.89286 | 8.93 | |
2 | 20.00 | 0.79719 | 15.94 | |
3 | 20.00 | 0.71178 | 14.24 | |
4 | 15.00 | 0.63552 | 9.53 | |
Total | - 1.359 |
1+r = 1+12% = 1.12
PVIF = present value interest factor = 1/1.12^n
PV = cash flow*relevant PVIF for the year