Northwest Compositions, Inc. is considering a project with the following cash flows: Initial...

Question:

Northwest Compositions, Inc. is considering a project with the following cash flows:

Initial Outlay = $216,000

Cash Flows:

Year 1 = $60,000

Year 2 = $60,000

Year 3 = $60,000

Compute the net present value of this project if the company's discount rate is 12%.

Answer and Explanation:

{eq}NPV= -Initial Outlay+\displaystyle\frac{FV}{(1+R)^1}+\displaystyle\frac{FV}{(1+R)^2}+\displaystyle\frac{FV}{(1+R)^3} {/eq}

Where,

R= 0.12

FV for year 1-3 = $60,000

Initial Outlay = $216,000

{eq}NPV= -216,000+\displaystyle\frac{60,000}{(1+0.12)^1}+\displaystyle\frac{60,000}{(1+0.12)^2}+\displaystyle\frac{60,000}{(1+0.12)^3} {/eq}

=-$71,890.12

Thus, NPV is -$71,890.12


Learn more about this topic:

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Cost of Capital: Flotation Cost, NPV & Internal Equity

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