Question

HKSBC is considering a project to expand its facility in the Republic of Taiwan. The initial...

HKSBC is considering a project to expand its facility in the Republic of Taiwan. The initial capital investment would require an expenditure of $1.5 million, and the expansion project would have a life of four (4) years. At the end of the four years, the investment would have no further value and would be disposed of. The annual after tax cash flow from the investment would be $600,000. The cost of financing the initial investment would be 15%.              
              
a. What is the net present value of the proposed project?              
              
              
              
b. Is this a project you would recommend (yes or no)?      

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Answer #1

a) NPV = present value of cash outflow- present value of cash inflow

Year

Cash Flow

PV factor @15% (1/(1+r)^n)

Discounted cash flow of (CF*PV)

1

600000

0.86956522

521739.1304

2

600000

0.75614367

453686.2004

3

600000

0.65751623

394509.7395

4

600000

0.57175325

343051.9474

Present Value of Cash Outflow

1712987.018

Present Value of Cash Inflow

1500000

Net Present Value

212987.0176

NPV of the project =212987

b) yes, the project is recommended because the NPV of the project is positive.

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