Question

Middlefield Motors is evaluating a project that would cost 6,200 dollars today. The project is expected to have the following other cash flows: 2,350 dollars in 1 year, -2,480 dollars in 3 years, and 7,540 dollars in 4 years. The cost of capital of the project is 5.64 percent. What is the net present value of the project? They are also evaluating a project that would cost 4,360 dollars today. The project is expected to produce annual cash flows of 264.65 dollars forever with the first annual cash flow expected in 1 year. The cost of capital associated with the project is 4.24 percent and the project’s internal rate of return is 6.07 percent. What is the net present value (NPV) of the project? Lastly, they are considering a project that is expected to cost 6,670 dollars today; produce a cash flow of 13,251 dollars in 7 years, and have an NPV of 395 dollars. What is the cost of capital for the project? Answer as a rate in a decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Answer 1

NPV = Initial cash outlay + Present value of all the cash inflows

PV = Cash flow at time n / ((1+discount rate)^n)

Years	Cash Flows	PV
0	-6200	-6200.00
1	2350	2224.54
2	0	0.00
3	-2480	-2103.62
4	7540	6054.21
NPV	-24.87
Discount rate		5.64%

PV of perpetuity = Cash flow/ discount rate

NPV of the project with perpetuity = Initial cash outflow +PV of perpetuity

= -4360 + (264.65/ 4.24%)

= 1881.7453

NPV = Initial cash outflow + PV of cash flow

395 = -6670 + [13,251/((1+r)^7)]

7,065 = 13,251/((1+r)^7)

(1+r)^7 = 1.8756

r= 9.4006%

Cost of Capital of the project = 9.4006%