Question

With an initial outlay of $100,000, Goldie’s Retreat is researching an expansion of their bed-n-breakfast by offering a Sunday brunch. The owner expects to see their money returned within 4 years and estimates an expected rate of return of 7%. With the following projected free cash flows, should the owner proceed with the investment? Use NPV and IRR to explain your answer.

IO = -$100,000

FCF Year 1 = $50,000

FCF Year 2 = $25,000

FCF Year 3 = $15,000

FCF Year 4 = $12,000

A. NPV = ______

B. IRR = _______

C. Should they proceed with the investment and why. _____________________

Answer 1