Question

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

Answer 1

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.