Firm B is considering the investment in a Project that requires an initial inves

Question

Firm B is considering the investment in a Project that requires an initial investment of $ 50, 000. For each of year 2 and 3 the projected that the project will yield a net cash outflow of $10,000. For each year 2 and 3 the projected Net cash Flow is $30, 000 (i.e. for each year). In year 4, it is projected that the project will yield a Net Cash Flow of $35,000 from operations. In addition, the project's estimated salvage value is $5,000. The Discount Rate on the project is 10%. Based on this information, please respond to each of the following questions What is the net Present Value of the project? we know about the IRR relative to the 10% Discount Rate?

Explanation / Answer

The discounted cash flows @10% are

Year 0=(50000)

Year1=10000*0.909=9090

Year 2=30000*0.827=24810

Year 3=30000*0.751=22530

Year 4=[35000+5000]*0.683=27320

Hence the net present value is $33750 which is positive and hence it is advisable to go ahead

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