RiverRocks, Inc., is considering a project with the following projected free cash flows:
Year |
0 |
1 |
2 |
3 |
4 |
Cash Flow (in millions) |
−$50.2 |
$9.1 |
$19.9 |
$20.8 |
$14.2 |
The firm believes that, given the risk of this project, the WACC method is the appropriate approach to valuing the project. RiverRocks' WACC is
11.4 %. What is the net present value of this project in millions??
Ans. | Year | Cash inflows | P V @ 11.4% | P V of cash inflow | |
1 | $9.10 | 0.8977 | $8.17 | ||
2 | $19.90 | 0.8058 | $16.04 | ||
3 | $20.80 | 0.7233 | $15.05 | ||
4 | $14.20 | 0.6493 | $9.22 | ||
Total present value of cash inflows | $48.47 | ||||
Net present value = Present value of cash inflows - Initial investment | |||||
$48.47 - $50.20 | |||||
-$1.73 | million | ||||
*Calculation of P V @ 11.4% | |||||
Year | P V @ 11.4% | ||||
1 | 1 / (1 + 0.114)^1 | 0.8977 | |||
2 | 1 / (1 + 0.114)^2 | 0.8058 | |||
3 | 1 / (1 + 0.114)^3 | 0.7233 | |||
4 | 1 / (1 + 0.114)^4 | 0.6493 |
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