Question

The Trojan company is contemplating investing $ 1 million in four new outlets in Los Angeles....

The Trojan company is contemplating investing $ 1 million in four new outlets in Los Angeles. The CFO of the company estimated that the investment will pay out cash flows of $200,000 per year for 9 years and nothing thereafter The CFO has determined the relevant discount rate for the investment is 15 percent This is the rate of return that the firm earn at comparable projects. Should the firm make the investment in the new outlets? (Please Show the work)

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Answer #1
Project
Discount rate 0.15
Year 0 1 2 3 4 5 6 7 8 9
Cash flow stream -1000000 200000 200000 200000 200000 200000 200000 200000 200000 200000
Discounting factor 1 1.15 1.3225 1.520875 1.7490063 2.011357 2.313061 2.66002 3.059023 3.517876
Discounted cash flows project -1000000 173913 151228.7 131503.2 114350.65 99435.35 86465.52 75187.41 65380.35 56852.48
NPV = Sum of discounted cash flows
NPV Project = -45683.22
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Reject project as NPV is negative
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