The Horizon Company will invest $60,000 in a temporary project that will generat

Question

The Horizon Company will invest $60,000 in a temporary project that will generate the following cash inflows for the next three years. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year Cash Flow

year 1- $ 15,000

year 2- 25,000

year 3- 40,000

The firm will also be required to spend $10,000 to close down the project at the end of the three years.

a. Compute the net present value if the cost of capital is 10 percent. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

Net present value $

- b. Should the investment be undertaken?

Yes

No

Explanation / Answer

a) Statemnet showing Cash flows Particulars Time PVf@10% Amount PV Cash Outflows                            -                1.00 (60,000.00)      (60,000.00) PV of Cash outflows      (60,000.00) Cash inflows                     1.00          0.9091     15,000.00         13,636.36 Cash inflows                     2.00          0.8264     25,000.00         20,661.16 Cash inflows                     3.00          0.7513     40,000.00         30,052.59 Cash inflows                     3.00          0.7513 (10,000.00)         (7,513.15) PV of Cash Inflows         56,836.96 NPV         (3,163.04) b) No since NPVis negative

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