Question

Bob’s Burgers is considering a project with an initial cost of $8 million that would produce cash flows of $1.5 million the first year, $2 million the second, and $2.5 million per year for the final two years. If the required return is 11.3%, should Bob do the project?

Answer 1

The NPV is computed as shown below:

= Initial investment + Present value of future cash flows

Present value is computed as follows:

= Future value / (1 + r)ⁿ

So, the NPV is computed as follows:

= - $ 8 million + $ 1.5 million / 1.113 + $ 2 million / 1.113² + $ 2.5 million / 1.113³ + $ 2.5 million / 1.113⁴

= - $ 1.5954 million Approximately

Since the NPV of the project is negative, hence the firm shall not do the project as it will lead to decrease in the value of the firm

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