Question

Consider the case of McCall Manufacturing:

McCall Manufacturing is evaluating a proposed capital budgeting project that will require an initial investment of $144,000. The project is expected to generate the following net cash flows:

Year	Cash Flow
Year 1	$41,200
Year 2	$51,100
Year 3	$46,800
Year 4	$44,900

Assume the desired rate of return on a project of this type is 9%. What is the net present value of this project? (Note: Do not round your intermediate calculations.)

$4,754.49

$15,845.40

$23,914.50

–$20,968.70

Suppose McCall Manufacturing has enough capital to fund the project, and the project is not competing for funding with other projects. Should McCall Manufacturing accept or reject this project?

Accept the project

Reject the project

Answer 1

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:

= - $ 144,000 + $ 41,200 / 1.09 + $ 51,100 / 1.09² + $ 46,800 / 1.09³ + $ 44,900 / 1.09⁴

= $ 4,754.49 Approximately

Since the NPV of the project is positive, hence the firm shall accept the project.

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