Question

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

Year	0	1	2	3	4
Cash Flow ​(in millions)	−$50.6	$10.9	$19.8	$19.4	$14.6

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

12.1%.

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 -$ 50.6 in Year 0, -$ 10.9 in Year 1, -$ 19.8 in Year 2, -$ 19.4 in Year 3, and -$ 14.6 in Year 4. The cash flow amounts are in millions of dollars.

Cash Flows (millions)

−$50.6

−$10.9

−$19.8

−$19.4

−$14.6

Year

0

1

2

3

4

B.The timeline starts at Year 0 and ends at Year 4. It shows cash flows of $ 50.6 in Year 0, -$ 10.9 in Year 1, -$ 19.8 in Year 2, -$ 19.4 in Year 3, and -$ 14.6 in Year 4. The cash flow amounts are in millions of dollars.

Cash Flows (millions)

$50.6

−$10.9

−$19.8

−$19.4

−$14.6

Year

0

1

2

3

4

C.The timeline starts at Year 0 and ends at Year 4. It shows cash flows of negative $ 50.6 in Year 0, $ 10.9 in Year 1, $ 19.8 in Year 2, $ 19.4 in Year 3, and $ 14.6 in Year 4. The cash flow amounts are in millions of dollars.

Cash Flows (millions)

−$50.6

$10.9

$19.8

$19.4

$14.6

Year

0

1

2

3

4

Your answer is correct.

D.The timeline starts at Year 0 and ends at Year 4. It shows cash flows of $ 50.6 in Year 0, $ 10.9 in Year 1, $ 19.8 in Year 2, $ 19.4 in Year 3, and $ 14.6 in Year 4. The cash flow amounts are in millions of dollars.

Cash Flows (millions)

$50.6

$10.9

$19.8

$19.4

$14.6

Year

0

1

2

3

4

The net present value of the project is

​$nothing

million. 

Answer 1

1. Option C is correct.

2. Use NPV method to arrive at whether the project has to be selected or rejected.

Use NPV function in EXCEL to find the value. If NPV is positive (>0), project has to selected or else it has to be rejected.

=NPV(rate,year1 to Year4 cashflows)-Year0 cashflow

=NPV(12.1%,year1 to Year4 cashflows)-50.6

NPV=-$2.10 million

NPV is negative, hence project has to be rejected

WACC	12.10%
	Cashflows
Year0	-50.6
Year1	10.9
Year2	19.8
Year3	19.4
Year4	14.6
NPV	-2.10