Question

You're the CFO of a company. You must decide whether or not to proceed with a project that will yield the following cash flows & using a 7% discount rate.

Initial investment = -$1,750,000

Year 1 = -$100,000 (more start-up costs)

Year 2 = +$100,000

Year 3 = +$300,000

Year 4 = +$500,000

Year 5 = +$700,000

Year 6 = +$200,000 (cash flow drops due to offsetting maintenance expense)

Year 7 = +$800,000

Answer 1

The net present value is calculated to make the decision.

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$1,750,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 7%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 7% discount rate is $781.46.

I recommend that the company must proceed with the project since it generates a positive net present value.