Question

Cliff Corporation (CC) has a current value of $110,000 and is expected to be worth $150,000 in one year based on its current projects. Additionally,CC also has a potential new project that costs $50,000 and will return $60,000 next year, but the CC does not have the money to invest and must raise it from outside investors. However, outside investors mistakenly believe the CCwill be worth $120,000in one year without the new project and $170,000with the project. The appropriate discount rate for CC and the new project is 6% annually.Does the project have a positive NPV? Acting on behalf of existing shareholders, should you take the project?

Answer 1

NPV of the new project

Present Value of Cash Inflow = 60000/(1.06)	56603.77
Present Value of Cash outflows = Investment	50000.00
NPV of the new project	6603.77

Project is having Positive NPV of 6603.77

CC Value without Project = (150000/1.06)                             =141509.43

CC Value with Project = (150000/1.06) +NPV (6603.77)    = 148113.21

Shareholders valuation of CC in future in current terms

CC Value without Project = (110000/1.06)	103773.58
CC Value with Project = (170000/1.06)	160377.36

Though shareholders expected higher value for CC with project. It is important to note that the project is having positive NPV. Therefore, Shareholders shall accept this project because of its positive NPV

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