Question

The Brewery, Inc. is considering an investment of $168,500 to create more brewing capacity to meet the increasing demand for their craft beer. They expect to generate the following net cash flows from this investment: year 1 of $86,000; year 2 of $91,000; and year 3 of $53,000, They use the NPV decision rule and want to know if this project would add value to the shareholders assuming a required return of 9%. Should this project be approved? What if the required return was 21%?

Answer 1

Ans NPV at 9% = $ 27917.69

At this point the NPV is positive and the project must be accepted.

NPV at 21% = -$5354.28

At this point the NPV is negative and the project must be rejected.

Year	Project Cash Flows (i)	DF@ 9%	DF@ 9% (ii)	PV of Project ( (i) * (ii) )	DF@ 21% (iii)	PV of Project ( (i) * (iii) )
0	-168500	1	1	(1,68,500.00)	1	(1,68,500.00)
1	86000	1/((1+9%)^1)	0.917431	78,899.08	0.826	71,074.38
2	91000	1/((1+9%)^2)	0.841680	76,592.88	0.683	62,154.22
3	53000	1/((1+9%)^3)	0.772183	40,925.72	0.564	29,917.12
		NPV	27,917.69	NPV	(5,354.28)