Question

The Windom Co. is considering a project with the following operating cash flows. Its initial cash flow is ($2,000) and its terminal (non-operating) cash flow is $500. WACC = 10%. Compute its NPV to see if it is acceptable.

Year 1 2 3

Operating CF $1,000 $1,200 $1,000

Answer 1

NPV = (-)Initial Outflow + Present value of cash inflows

Present value of a cash flow can be computed as -

PV = Amount / (1 + r)ⁿ where r is the WACC or discount rate, n is the year which it represents

NPV = (-)Initial Outflow + [ Year 1 OCF / (1 + 0.10)¹ ] + [ Year 1 OCF / (1 + 0.10)² ] + [ Year 1 OCF / (1 + 0.10)³ ] + [ Terminal cash flow / (1 + 0.10)³ ]

or, NPV = (-)$2000 + [ $1000 / (1 + 0.10)¹ ] + [ $1200 / (1 + 0.10)² ] + [ $1000 / (1 + 0.10)³ ] + [ $500 / (1 + 0.10)³ ]

or, NPV = $1027.798648 or $1027.80

Since NPV is postive, the project is acceptable.