Roda is reviewing a capital budgeting proposal from Nora, Inc. Nora is considering investing in new...

Roda is reviewing a capital budgeting proposal from Nora, Inc. Nora is considering investing in new equipment. The details of the proposal are as follows:

The net investment outlay is $580,000.
The investment will generate $275,500 in after-tax incremental cash flow at the end of each of the next 5 years.
At the end of the fifth year, there will be an after-tax terminal cash flow of $138,500.
The weighted average cost of capital for this project is 12%.

The net present value of the investment is closest to:

(A.) 335,378

(B.) 483,284

(C.) 491,704

(D.) 936,000

(E.) 1,651,704

Solutions

Expert Solution

Net present value = present value of net cash inflow - Total net intial investment

Net investment outlay = $580,000

Net cash inflow generated for each year upto 5 years = $ 275,500

Terminal cash inflow = $ 138,500

Average cost of captial = 12%

Present Value = Future value/ (1+r)ⁿ

sample calculation for year 2

cash inflow generated in year 2 =$ 275,500

then Present Value = 275,500/ (1+ 0.12)²

=219,626.9133

Answer = C (491,704)

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jeff jeffy answered 1 year ago

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