Question

A company is in the process of constructing a new plant at a cost of $20 million. It expects the project to generate cash flows of $8 million, $5 million, and $11 million over the next three years. The cost of capital is 13.2 percent p.a. What is the net present value of this project? (in millions to three decimals)

Select one:

a. $-1.448

b. $38.552

c. $-3.611

d. $-0.933

Answer 1

NPV = PV of annual cash inflow – Initial investment

Year	Cash Flow (C)	Computation of PV Factor	PV Factor @ 13.2 % (F)	PV (C x F)
0	-$ 20 M	1/ (1+0.132)0	1	-$ 20 M
1	8 M	1/ (1+0.132)1	0.883392226148410	7.067138 M
2	5 M	1/ (1+0.132)2	0.780381825219444	3.901909 M
3	11 M	1/ (1+0.132)3	0.689383237826364	7.583216 M
			NPV	-1.447737

NPV of the project is - $ 1.447737 M or -$ 1.448 M

Hence option “a. -$ 1.448 M” is correct answer.