Question

Matthew is evaluating the feasibility of purchasing a factory. He will have to make an upfront payment of $1,470,000. He will then need to invest $900,000 one year from now and $950,000 two years from now to upgrade and expand the facilities. The factory is expected to generate net returns of $380,000 from the second year onwards. He plans to sell the factory at the end of eight years for $4,000,000. His required rate of return is 15%. Using the net present value (NPV) criterion, determine if he should accept or reject this project.

Answer 1

Net Cash Flow for 2nd year = Cash Inflow from Return-Cash Outflow for upgrade = 380000-950000 = -570000

Year	Discounting Factor [1/(1.15^year)]	Cash Flow	PV of Cash Flows (cash flow*discounting factor)
0	1	-1470000	-1470000
1	0.869565217	-900000	-782608.6957
2	0.756143667	-570000	-431001.8904
3	0.657516232	380000	249856.1683
4	0.571753246	380000	217266.2333
5	0.497176735	380000	188927.1594
6	0.432327596	380000	164284.4864
7	0.37593704	380000	142856.0752
8	0.326901774	380000	124222.6741
8	0.326901774	4000000	1307607.095
		NPV = Sum of PVs	-288590.6939

As NPV is Negative, Project should be Rejected