Question

In: Finance

Birnham Motors is considering adding a new location to their existing car lots. The new facility...

Birnham Motors is considering adding a new location to their existing car lots. The new facility will cost $12.7 million to construct. Management uses a discount rate of 10.9%. They anticipate the following cash flows for next seven years:

Year Cash Flow
1 2.2m
2 2.5m
3 2.9m
4 3.1m
5 3.4m
6 3.6m
7 3.9m

The proposed project's net present value is closest to:

Solutions

Expert Solution

NPV = $1.34 million

  • Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over the life of an investment project.
  • NPV is used to evaluate investment projects in capital budgeting.
  • A project with a positive NPV is accepted. A positive NPV indicates that the project will result in net cash inflows in today's dollars.
  • A project with a negative NPV is rejected. A negative NPV indicates that the project will result in net cash outflows in today's dollars.
  • The cash flows are discounted at a required rate of return. It may be weighted average cost of capital, cost of debt, etc.

jeff jeffy answered 1 year ago
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