Question

X company provides specialty manufacturing services to defence contractors located in the Seattle, WA area. The initial outlay is $4 million and, management estimates that the firm might generate cash flows for years one through five equal to $800,000; $750,000; $1,000,000; $1,900,000; and $2,000,000. Saber uses a 20% discount rate for projects of this type.
Is this a good investment opportunity?

Answer 1

HI

Here cash flows = -$4,000,000 $800,000 $750,000 $1,000,000 $1,900,000 $2,000,000

Discount rate r= 20%

To conclude whether this is a good investment opportunity, we will calculate NPV of the project.

NPV = -4,000,000 + 800,000/(1+20%) + 750000/(1+20%)^2 + 1000000/(1+20%)^3 + 1900000/(1+20%)^4+2000000/(1+20%)^5

=-4,000,000 + 666666.67 + 520833.3 + 578703.70 + 916280.86 + 803755.14

=-513,760

Since NPV is negative, hence this is not a good investment opportunity.

Thanks