Bradley Company%u2019s required rate of return is 14%. The company has an opport

Question

Bradley Company%u2019s required rate of return is 14%. The company has an opportunity to be the exclusive distributor of a popular consumer item. No new equipment would be needed, but the company would have to use one-fourth of the space in a warehouse it owns. The warehouse cost $200,000 new and is currently half-empty. There are no other plans to use the empty space. In addition, the company would have to invest $100,000 in working capital to carry inventories and accounts receivable for the new product line. The company would have the distributorship for only 5 years. The distributorship would generate a $17,000 annual net cash inflow. (Ignore income taxes)

Compute the net present value of the project at 14% by inputting the variables that are entered into your calculator / Excel. (If a variable is not used in the calculation, input a zero (0) Round answers to the nearest dollar and use a minus sign for negative numbers.

Bradley Company%u2019s required rate of return is 14%. The company has an opportunity to be the exclusive distributor of a popular consumer item. No new equipment would be needed, but the company would have to use one-fourth of the space in a warehouse it owns. The warehouse cost $200,000 new and is currently half-empty. There are no other plans to use the empty space. In addition, the company would have to invest $100,000 in working capital to carry inventories and accounts receivable for the new product line. The company would have the distributorship for only 5 years. The distributorship would generate a $17,000 annual net cash inflow. (Ignore income taxes)

Explanation / Answer

Hi,

Please find the answer as follows:

Interest Rate = 14%

Nper = 5 Years

PMT = 17000

PV = -100000

FV = 0

NPV = -100000 + 17000/(1+.14)^1 + 17000/(1+.14)^2 + 17000/(1+.14)^3 + 17000/(1+.14)^4 + 17000/(1+.14)^5 = -41637

No, the project should not be accepted.

Thanks.

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