Question

An auto-parts company is deciding whether to sponsor a racing team for a cost of $4,334,316. The sponsorship would last for 9 years and is expected to have cash flows by $398,554 per year. If the discount rate is 10.72%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship?

Answer 1

The change in the value is computed as shown below:

The NPV is computed as shown below:

= Initial investment + Present value of future cash flows

Present value is computed as follows:

= Future value / (1 + r)ⁿ

So, the NPV is computed as follows:

= - $ 4,334,316 + $ 398,554 / 1.1072¹ + $ 398,554 / 1.1072² + $ 398,554 / 1.1072³ + $ 398,554 / 1.1072⁴ + $ 398,554 / 1.1072⁵ + $ 398,554 / 1.1072⁶ + $ 398,554 / 1.1072⁷ + $ 398,554 / 1.1072⁸ + $ 398,554 / 1.1072⁹

= - $ 2,103,279.121

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