Question

Firm W has the opportunity to invest $150,000 in a new venture. The projected cash flows from the venture are as follows.

	Year 0		Year 1		Year 2		Year 3
Initial investment	$	(150,000)
After-tax cash flow			$	5,000	$	8,000	$	10,000
Return of investment								150,000
Net cash flow	$	(150,000)	$	5,000	$	8,000	$	160,000

a-1. Complete the below table to calculate NPV. Assume Firm W uses a 6 percent discount rate.

Complete the below table to calculate NPV. Assume Firm W uses a 6 percent discount rate. (Cash outflows and negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.)

	Year 0 Year 1 Year 2 Year 3 Net cash flow Discount factor (6%) Present value NPV

b-1. Complete the below table to calculate NPV. Assume Firm W uses a 3 percent discount rate.

Complete the below table to calculate NPV. Assume Firm W uses a 3 percent discount rate. (Cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.)

	Year 0 Year 1 Year 2 Year 3 Net cash flow Discount factor (3%) Present value NPV

Answer 1

• All working forms part of the answer
• Requirement a-1

Working		Year 0	Year 1	Year 2	Year 3
A	Net cash flow	$                 (1,50,000.00)	$                                 5,000.00	$                              8,000.00	$                      1,60,000.00
B	Discount factor (6%)	1	0.943	0.890	0.840
C=A x B	Present value	$                 (1,50,000.00)	$                                 4,715.00	$                              7,120.00	$                      1,34,400.00
D = sum of 'C' values	NPV	[ 4715 + 7120 + 134400 + (-150000)]			$                         (3,765.00)

• Requirement b-1

Working		Year 0	Year 1	Year 2	Year 3
A	Net cash flow	$                 (1,50,000.00)	$                                 5,000.00	$                              8,000.00	$                      1,60,000.00
B	Discount factor (3%)	1	0.971	0.943	0.915
C=A x B	Present value	$                 (1,50,000.00)	$                                 4,855.00	$                              7,544.00	$                      1,46,400.00
D = sum of 'C' values	NPV	[4855 + 7544 + 146400 + (-150000)			$                            8,799.00