3. Project analysis Aa Aa Bancroft Inc. has summarized the expected cash flows f

Question

3. Project analysis Aa Aa Bancroft Inc. has summarized the expected cash flows from a proposed project below. 0 1 2 t 3 t 4 Total investment outlay $400,000 Operating cash flow, OCF $120,000 $120,000 $120,000 $120,000 $55,000 otal termination cash flow If the project's WACC is 10.5%, what is the project's NPW? O $9,450.82 O $13,193.42 $11,315.27 O O $15,085.40 $20,845.67 O The firm used its WACC of 10.5% to evaluate this project because it believes the project is of average risk. Suppose the project actually had lower-than-average risk, and the CFO thinks the WACC should be risk-adjusted. What effect would this have on the project's NPW? O Increase NPV O Decrease NPW O No effect on NPV Bancroft Inc. is going to use factory space for this project that it usually rents to other firms. If this project is accepted, Bancroft will not be able to rent the space anymore. If the firm usually generates $10,000 per year in after-tax leasing revenue from the factory space, what is the value of the project when you consider this factor? Assume Bancroft still considers the project to have average risk and uses a WACC of 10.5%. O -$12,856.01 O -$21,640.00 O -$18,165.16 O -$23,358.40 O -$14,638.82 Suppose Bancroft's management team discloses that nearly $400,000 in research and development costs were incurred before the new project proposal was put together. What effect would this have on the project's NPW? O No effect on NPV O Decrease NPV O Increase NPV

Explanation / Answer

               = -$18165.16

There will be increase in NPV as there will be more cost in reasearch and development.

3. NPV= Cash Inflows-Cash Outflows                = 120000*3.13+55000*.670-400000                 =   376303+36890-400000                = 13193.42 4. NPV= Cash Inflows-Cash Outflows                = 120000*3.13+55000*.670-400000-10000*3.13                 =   376303+36890-400000-31359

               = -$18165.16

There will be increase in NPV as there will be more cost in reasearch and development.

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