Skyline Corp. will invest $300,000 in a project that will not begin to produce r

Question

Skyline Corp. will invest $300,000 in a project that will not begin to produce returns until the end of the 3rd year. From the end of the 3rd year until the end of the 12th year (10 periods), the annual cash flow will be $65,000.

Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Calculate the net present value if the cost of capital is 15 percent. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

Should the project be undertaken?

Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=65,000/1.15^3+300,000/1.15^4+300,000/1.15^5+.........+300,000/1.15^12

=65000[1/1.15^3+1/1.15^4+.............+1/1.15^12]

=$65000*3.794910114

=$246,669.16

NPV=Present value of inflows-Present value of outflows

=$246,669.16-$300,000

=($53,330.84)(Approx)(Negative).

Hence since NPV is negative;project must not be undertaken.

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