Question

Aerospace Dynamics will invest $150,000 in a project that will produce the following cash flows. The cost of capital is 10 percent. (Note that the fourth year’s cash flow is negative.)

  

Year	Cash Flow
1		$	45,000
2			57,000
3			65,000
4			(48,000	)
5			140,000

a. What is the net present value of the project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)
  

  
b. Should the project be undertaken? Yes or No

Answer 1

Given about a project of Aerospace Dynamics,

Initial investment C0 = $150000

Yearly cash flows are

CF1 = $45000

CF2 = $57000

CF3 = $65000

CF4 = $-48000

CF5 = $140000

cost of capital d = 10%

a). NPV of the project is sum of PV of all future cash flows - inital cost

NPV = -C0 + CF1/(1+d) + CF2/(1+d)^2 + CF3/(1+d)^3 + CF4/(1+d)^4 + CF5/(1+d)^5

NPV = -150000 + 45000/1.1 + 57000/1.1^2 + 65000/1.1^3 - 48000/1.1^4 + 140000/1.1^5 = $40996.33

b). Yes, project should be undertaken by Aerospace dynamics as NPV of the project at cost of capital 10% is positive.