WW Industries is considering a proposal for a joint venture that will require an investment of...

WW Industries is considering a proposal for a joint venture that will require an investment of $13 million. At the end of the 5th year, WWI’s joint venture partner will buy out WWI’s interest for $10 million. WWI’s CFO has estimated that the appropriate discount rate for this proposal is 12%.

a. Calculate the NPV for this proposal

b. Construct a table and graph the NPV Profile for interest rates between 1% and 25%

c. Make a recommendation to the CFO concerning whether WWI should enter into this joint venture.

The expected cash flows are given below.

Year Cash Flow

0 -13,000,000

1 3,000,000

2 3,000,000

3 3,000,000

4 3,000,000

5 10,000,000

Solutions

Expert Solution

NPV = Total of PV of Cash Inflows - PV of Cash Outflows

Sum of PV of Cash Inflow = Cash Flow₁ / (1 + Discount Rate)¹ + Cash Flow₂ / (1 + Discount Rate)² + ..... + Cash Flow_n / (1 + Discount Rate)ⁿ

The CFO should enter into this JV because at the current discount rate of 12%, the NPV of the project is positive

jeff jeffy answered 1 year ago

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