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.
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