Question

Vita-Chips Co. has invested in a new plant that will produce nutritious corn chips. The initial cost is $120 million. The company anticipates net cash flows of $60 million next year, $40 million, $20 million, $10 million, $5 million and then $0 over each of the following years. Vita-Chips require a 10% return per year on their investment. Calculate the net present value (NPV) of this investment. Should Vita accept the project?

Answer 1

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$120 million. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the required return of 10%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 10% required return is -$7.4357 million.

Vita-Chips Co should not accept the investment since it generates a negative net present value.

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