Question

Do not round intermediate calculations. Final dollar answers should be rounded to two decimal places. Final interest rate answers should be rounded to 4 decimal places if stated as a percentage, and 6 decimal places otherwise. Final answers indicating periods should be rounded up to whole periods.

PLEASE SHOW ALL WORK! WITHOUT FINANCIAL CALCULATOR

Vita-Chips Co. has invested in a new plant that will produce nutritious corn chips. The initial cost is $120 million. The company anticipates net cash flows of $60 million next year, $40 million, $20 million, $10 million, $5 million and then $0 over each of the following years. Vita-Chips require a 10% return per year on their investment. Calculate the net present value (NPV) of this investment. Should Vita accept the project?

Answer 1

Present value = Future value / (1 + rate)^time

Present value of cash inflows = 60,000,000 / (1 + 0.1)^1 + 40,000,000 / (1 + 0.1)^2 + 20,000,000 / (1 + 0.1)^3 + 10,000,000 / (1 + 0.1)^4 + 5,000,000 / (1 + 0.1)^5 + 0

Present value of cash inflows = 54,545,454.55 + 33,057,851.24 + 15,026,296.02 + 6,830,134.554 + 3,104,606.615

Present value of cash inflows = 112,564,343

Net present value = Present value of cash inflows - present value of cash outflows

Net present value = 112,564,343 - 120,000,000

Net present value = -$7,435,657.03

Vita should NOT accept the project as net present value is negative.