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Small Effect Corp is considering investing $70 million in a new factory that will generate net...

Small Effect Corp is considering investing $70 million in a new factory that will generate net monthly cash flows beginning four months from today. The first cash flow will equal $2 million and subsequent cash flows will shrink by 1% each through the final cash flow which will occur four years and 1 month from today. The project’s cost of capital equals 12.5% per year. Set up the calculations needed to determine the net present value of factory.

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Expert Solution

Discount rate per month = discount rate per year/12 = 12.5/12 = 1.0417%

Discount Factor = 1/(1 + Disount rate per month)^Month

NPV = Sum of all PV

Discount Rate per year 12.50%
Discount Rate per month 1.0417%
Month Cash Flow Discount Factor PV
0 -70000000 1 -70000000
1 0 0.989690722 0
2 0 0.979487725 0
3 0 0.969389913 0
4 2000000 0.959396202 1918792.405
5 1980000 0.94950552 1880020.93
6 1960200 0.939716803 1842032.878
7 1940598 0.930029001 1804812.42
8 1921192.02 0.920441073 1768344.045
9 1901980.1 0.91095199 1732612.557
10 1882960.299 0.901560732 1697603.066
11 1864130.696 0.892266292 1663300.984
12 1845489.389 0.88306767 1629692.015
13 1827034.495 0.87396388 1596762.156
14 1808764.15 0.864953943 1564497.684
15 1790676.509 0.856036892 1532885.153
16 1772769.743 0.847211769 1501911.391
17 1755042.046 0.838477628 1471563.491
18 1737491.626 0.829833528 1441828.806
19 1720116.709 0.821278543 1412694.946
20 1702915.542 0.812811754 1384149.769
21 1685886.387 0.804432252 1356181.382
22 1669027.523 0.796139136 1328778.13
23 1652337.248 0.787931516 1301928.592
24 1635813.875 0.77980851 1275621.581
25 1619455.736 0.771769247 1249846.135
26 1603261.179 0.763812863 1224591.512
27 1587228.567 0.755938504 1199847.189
28 1571356.282 0.748145324 1175602.854
29 1555642.719 0.740432485 1151848.404
30 1540086.292 0.732799161 1128573.942
31 1524685.429 0.72524453 1105769.767
32 1509438.574 0.717767782 1083426.378
33 1494344.189 0.710368115 1061534.464
34 1479400.747 0.703044732 1040084.901
35 1464606.739 0.695796848 1019068.753
36 1449960.672 0.688623685 998477.2605
37 1435461.065 0.681524471 978301.8437
38 1421106.455 0.674498446 958534.0951
39 1406895.39 0.667544854 939165.7773
40 1392826.436 0.660662948 920188.8193
41 1378898.172 0.65385199 901595.3133
42 1365109.19 0.647111248 883377.5111
43 1351458.098 0.640439998 865527.8212
44 1337943.517 0.633837523 848038.8054
45 1324564.082 0.627303116 830903.1759
46 1311318.441 0.620836074 814113.7922
47 1298205.257 0.614435702 797663.6578
48 1285223.204 0.608101313 781545.9179
49 1272370.972 0.601832227 765753.8561
NPV -12170603.67

jeff jeffy answered 1 year ago
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