Question

You are the CFO of a beer and wine distribution company, B&W Company, which is planning to expand into Florida. The Board has asked you to do an analysis of the expected return on a new warehouse and related equipment required for the expansion. The new warehouse would be more efficient and could handle the volume anticipated in the new territory. The project would require an initial investment of $20 million with an add-on investment of $5 million at the end of Year 2. The expected after-tax returns for the next 5 years are: $4 million, $5 million, $8 million,          $9 million, and $9 million respectively.

You assume the project’s returns are received at the end of each year and have determined the WACC is 8%.

1. What is the NPV for this project?

Answer 1

Project
Discount rate	8.000%
Year	0	1	2	3	4	5
Cash flow stream	-20	4	0	8	9	9
Discounting factor	1.000	1.080	1.166	1.260	1.360	1.469
Discounted cash flows project	-20.000	3.704	0.000	6.351	6.615	6.125
NPV = Sum of discounted cash flows
NPV Project =	2.79 m
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor