Question

The Horizon Company will invest $50,000 in a temporary project that will generate the following cash inflows for the next three years.

Year. Cash Flow

1 $15,000

2 30,000

3 20,000

The firm will also be required to spend $10,000 to close down the project at the end of the three years.

a. Compute the net present value if the cost of capital is 12 percent. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

b. Should the investment be undertaken?

Answer #1

1 | ||||

Year |
Cash Flow |
PV @ 12% |
||

0 | (50,000) | 1 | (50,000.00) | |

1 | 15,000 | 0.89286 | 13,392.90 | |

2 | 30,000 | 0.79719 | 23,915.70 | |

3 | 20,000 | 0.71178 | 14,235.60 | |

3 | (10,000) | 0.71178 | (7,117.80) | |

Net
present value |
(5,573.60) |
|||

2 | No, the investment should not be undertaken | |||

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