Question

​RiverRocks, Inc., is considering a project with the following projected free cash​ flows:

Year	0	1	2	3	4
Cash Flow ​(in millions)	−$49.3	$10.6	$20.8	$19.7	$15.8

The firm believes​ that, given the risk of this​ project, the WACC method is the appropriate approach to valuing the project.​RiverRocks' WACC is

11.5%.

Should it take on this​ project? Why or why​ not?

The timeline for the​ project's cash flows​ is: ​(Select the best choice​ below.)

A.The timeline starts at Year 0 and ends at Year 4. It shows cash flows of $ 49.3 in Year 0, -$ 10.6 in Year 1, -$ 20.8 in Year 2, -$ 19.7 in Year 3, and -$ 15.8 in Year 4. The cash flow amounts are in millions of dollars.

Cash Flows (millions)

$49.3

−$10.6

−$20.8

−$19.7

−$15.8

Year

0

1

2

3

4

B.The timeline starts at Year 0 and ends at Year 4. It shows cash flows of $ 49.3 in Year 0, $ 10.6 in Year 1, $ 20.8 in Year 2, $ 19.7 in Year 3, and $ 15.8 in Year 4. The cash flow amounts are in millions of dollars.

Cash Flows (millions)

$49.3

$10.6

$20.8

$19.7

$15.8

Year

0

1

2

3

4

C.The timeline starts at Year 0 and ends at Year 4. It shows cash flows of negative $ 49.3 in Year 0, $ 10.6 in Year 1, $ 20.8 in Year 2, $ 19.7 in Year 3, and $ 15.8 in Year 4. The cash flow amounts are in millions of dollars.

Cash Flows (millions)

−$49.3

$10.6

$20.8

$19.7

$15.8

Year

0

1

2

3

4

D.The timeline starts at Year 0 and ends at Year 4. It shows cash flows of -$ 49.3 in Year 0, -$ 10.6 in Year 1, -$ 20.8 in Year 2, -$ 19.7 in Year 3, and -$ 15.8 in Year 4. The cash flow amounts are in millions of dollars.

Cash Flows (millions)

−$49.3

−$10.6

−$20.8

−$19.7

−$15.8

Year

0

1

2

3

4

The net present value of the project is

​$nothing

million.  ​(Round to three decimal​ places.)RiverRocks

▼

should

should not

take on this project because the NPV is

▼

positive

negative

.

Answer 1

The correct timeline is option C since the year 0 cash flow is an investment and shall be in negative and future cash flows are inflows and hence should be positive.

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:

= - $ 49.3 million + $ 10.6 million / 1.115 + $ 20.8 million / 1.115² + $ 19.7 million / 1.115³ + $ 15.8 million / 1.115⁴

= $ 1.371 million

Since the NPV is positive, hence the project shall be accepted.

Feel free to ask in case of any query relating to this question