Macy Pharmacy has a project which has the following cash flows. Year 0 = -$200,000 Year...

Macy Pharmacy has a project which has the following cash flows.

Year 0 = -$200,000

Year 1 = $50,000

Year 2 = $100,000

Year 3 = $150,000

Year 4 = $40,000

Year 5 = $25,000

The initial cost of capital is 10%. The financial manager wants to see what happens to the project's net present value if the cost of capital were increased to 12%.

		the NPV would increase by 2%
		the NPV would increase by 15%
		the NPV would decrease by 2%
		the NPV would decrease by 15%

Expert Solution

Calculation of NPV

Statement showing Cash flows
Particulars	Time	PVf 10%	Amount($)	PV
Cash Outflows	-	1.00	-2,00,000.00	-2,00,000.00
PV of Cash outflows = PVCO				-2,00,000.00
Cash inflows	1.00	0.9091	50,000.00	45,454.55
Cash inflows	2.00	0.8264	1,00,000.00	82,644.63
Cash inflows	3.00	0.7513	1,50,000.00	1,12,697.22
Cash inflows	4.00	0.6830	40,000.00	27,320.54
Cash inflows	5.00	0.6209	25,000.00	15,523.03
PV of Cash Inflows =PVCI				2,83,639.96
NPV= PVCI - PVCO				83,639.96

Statement showing Cash flows
Particulars	Time	PVf 12%	Amount($)	PV
Cash Outflows	-	1.00	-2,00,000.00	-2,00,000.00
PV of Cash outflows = PVCO				-2,00,000.00
Cash inflows	1.00	0.8929	50,000.00	44,642.86
Cash inflows	2.00	0.7972	1,00,000.00	79,719.39
Cash inflows	3.00	0.7118	1,50,000.00	1,06,767.04
Cash inflows	4.00	0.6355	40,000.00	25,420.72
Cash inflows	5.00	0.5674	25,000.00	14,185.67
PV of Cash Inflows =PVCI				2,70,735.68
NPV= PVCI - PVCO				70,735.68

Percentage change in NPV= (70735.68-83639.96)/83639.96100= -12904.3/83639.96100= -15.42%
So correct answer is The NPV would decrease by 15%

jeff jeffy answered 2 years ago

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