Question

​(NPV with varying required rates of return​) Gubanich Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of ​$4,000,000 and would generate annual free cash inflows of ​$1,100,000 per year for 6 years. Calculate the​ project's NPV ​given:

a. A required rate of return of 8 percent

b. A required rate of return of 11 percent

c. A required rate of return of 14 percent

d. A required rate of return of 17 percent

Answer 1

NPV = -Initial investment + Present value of cash flows

a. NPV = -$4,000,000 + $1,100,000/1.08 + $1,100,000/1.08^2 + $1,100,000/1.08^3 + $1,100,000/1.08^4 + $1,100,000/1.08^5 + $1,100,000/1.08^6 = $1,085,167.63

b. NPV = -$4,000,000 + $1,100,000/1.11 + $1,100,000/1.11^2 + $1,100,000/1.11^3 + $1,100,000/1.11^4 + $1,100,000/1.11^5 + $1,100,000/1.11^6 = $653,591.64

c. NPV = -$4,000,000 + $1,100,000/1.14 + $1,100,000/1.14^2 + $1,100,000/1.14^3 + $1,100,000/1.14^4 + $1,100,000/1.14^5 + $1,100,000/1.14^6 = $277,534.27

d. NPV = -$4,000,000 + $1,100,000/1.17 + $1,100,000/1.17^2 + $1,100,000/1.17^3 + $1,100,000/1.17^4 + $1,100,000/1.17^5 + $1,100,000/1.17^6 = -51,896.77