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. $-0.933
NPV = PV of annual cash inflow – Initial investment
Year |
Cash Flow (C) |
Computation of PV Factor |
PV Factor @ 13.2 % (F) |
PV (C x F) |
0 |
-$ 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.
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