Question

Managers of CVS Pharmacy are considering a new project. This project would be a new store in Odessa, Texas. They estimate the following expected net cash flows if the project is adopted.

Year 0: ($1,250,000)

Year 1: $200,000

Year 2: $500,000

Year 3: $400,000

Year 4: $300,000

Year 5: $200,000

Suppose that the appropriate discount rate for this project is 5.2%, compounded annually.

Calculate the net present value for this proposed project.

Do not round at intermediate steps in your calculation. Round your answer to the nearest dollar. If the NPV is negative, include a minus sign. Do not type the $ symbol.

Answer 1

Statement of NPV Computation

Years	Cash flows	[email protected]%	PV
[1]	[2]	[3]	[4]=[2 x3]
0	(1,250,000)	1	(1,250,000)
1	200,000	0.95057	190,114
2	500,000	0.90358	451,790
3	400,000	0.85892	343,568
4	300,000	0.81646	244,938
5	200,000	0.77611	155,222
NPV			135,632

Therefore, NPV of the project =135,631

Explanation:

Net Present Value (NPV) = PV of Expected Cash Inflows – Initial cash outflow i.e at Year 0

PV =Present Value

PVF =Present Value Factor = 1/(1+r)ⁿ

r = Discounting rate = =5.2%=0.052