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CORRECTED. YEARS 0-4. (NO 5). RiverRocks, Inc., is considering a project with the following projected free...

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.)

Solutions

Expert Solution

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

jeff jeffy answered 3 months ago
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