Question
In: Finance
Aerospace Dynamics will invest $180,000 in a project that will produce the following cash flows. The...
Aerospace Dynamics will invest $180,000 in a project that will produce the following cash flows. The cost of capital is 11 percent. (Note that the fourth year’s cash flow is negative.) Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Year Cash Flow
1. $ 62,000
2. 74,000
3. 66,000
4. (63,000 )
5. 140,000
a. What is the net present value of the project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)
b. Should the project be undertaken?
Yes
No
Solutions
Expert Solution
Total investment value = $180000
Cost of capital = 11%
To undertake a project the cash flows should atleast meet the cost of capital.
Now, let us put the cost of capital to assess the NPV of the future cash flows and analyze the below table -
| Year (t) | Cash flow | Present value | Computation of NPV with respect to each year = (Cash flows)/( 1+r)^t |
| 1 | 62000 | $55,855.855856 | 62000/(1+.11)^1 |
| 2 | 74000 | $60,060.060060 | 74000/(1+.11)^2 |
| 3 | 66000 | $48,258.631166 | 66000/(1+.11)^3 |
| 4 | -63000 | -$41,500.051371 | (63000)/(1+.11)^4 |
| 5 | 140000 | $83,083.185928 | 140000/(1+.11)^5 |
| 205757.68 |
a) To obtain the net present value(NPV) we have = 205757.68 - 180000 = $25757.68
b) Since the NPV is positive, Yes, the project can be undertaken.
jeff jeffy answered 2 years agoRelated Solutions
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0
$
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1
–
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$64,000
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165
000
165
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