Question

In: Finance

Drongo Corporation is considering an investment with a payback of five years and a cost of...

Drongo Corporation is considering an investment with a payback of five years and a cost of $12000. If the required return is 8%, what is the worst-case NPV? Explain. Show working out.

eg, NPV = cost/(1 + required return)t – cost

Solutions

Expert Solution

In worst case, total cost will be receoverd in 5th year in the given scenario

r = required return = 8%

t = 5 years

NPV = Cost / (1+r)^t - Cost

= [$12,000 /.(1+8%)^5] - $12,000

= [$12,000 / 1.46932808] - $12,000

= $8,166.99835 - $12,000

= -$3,833.00165

Therefore, Worst case NPV is -$3,833


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