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9. A new business opportunity has presented itself. The business venture is expected to last for...

9. A new business opportunity has presented itself. The business venture is expected to last for ten years. For the first four years, negative cash flows of $30,000 per year are expected at the end of each year. No net cash flow is expected at the end of year five. A positive cash flow of $35,000 is anticipated at the end of year six. A positive cash flow of $45,000 is expected at the end of years seven through ten. At the end of year ten, the business will be sold for $270,000. What is the present value of all of the future cash flows, assuming a 16.50% annual cost of capital? HINT: Use a timeline. If the business venture will cost you $189,000 to establish today, what is the net present value of the business venture? Should you pursue it?

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Answer #1

Answer : 9)

Below is the table showing present value of Future Cash Flows :

Year Cash Inflow Present Value Factor @16.5% Present value of cash inflow
1 -30000 0.858369099 -25751.07296
2 -30000 0.73679751 -22103.92529
3 -30000 0.632444214 -18973.32643
4 -30000 0.54287057 -16286.11711
5 0 0.465983322 0
6 35000 0.399985684 13999.49895
7 45000 0.343335351 15450.0908
8 45000 0.294708456 13261.88052
9 45000 0.252968632 11383.58843
10 45000 0.217140456 9771.320539
10 270000 0.217140456 58627.92324
Total Present value of cash inflow 39,379.86069

Net Present Value will be the diffrence of Present Value of Cash Inflow and Present Value of Cash Outflow :

which is (-149,620.14).

Since Net Present Value of the project is negative therefore it should not be pursued.

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