Question

1. Northwestern College is building a new science building. The initial costs are: $12 million due at the end of the year for the next three years. Starting three years from today, the new science building can bring in an additional $3 million for the next 20 years. What is the net present value of this new building? Should the new building be built according to the NPV rule? Assume the interest rate is 5 percent.[1]

Answer 1

You need to use a Financial calculator to solve this problem. You can download it.

Press CF Button,

Press Down arrow key, CO1 = -12,000,000 (As there will be an outflow from the project at the end of each year for 3 years, so negative), Down Arrow Key, FO1=3 (As the same outflow is for 3 years)

Like this fill CO2=3,000,000 (The inflow starts from year 4, so positive 3M), Down Arrow Key, FO1=20 (As the same inflow is for 20 years)

Press NPV Button, I=5 (The required return is 5%)

Press Down arrow key, press CPT, NPV = -382,998.78

According to the NPV rule, the present value of the building is showing a loss of 382,998. So the building shouldn't be built.

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