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:

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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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