A number of companies, including Litchfield Design and Oxygen Optimization, are

Question

A number of companies, including Litchfield Design and Oxygen Optimization, are considering undertaking project A, which is believed by all to have a level of risk that is equal to that of the average-risk project at Litchfield Design. Project A is a project that would require an initial investment of 4,730 dollars and then produce an expected cash flow of 7,037 dollars in 5 years. Project A has an internal rate of return of 8.269 percent. The weighted-average cost of capital for Litchfield Design is 10.8 percent and the weighted-average cost of capital for Oxygen Optimization is 12.42 percent. What is the NPV that Oxygen Optimization would compute for project A?

Explanation / Answer

Net present value = Present value of cash inflows - Present value of cash outflows

Oxyzen Optimization

= 7037*PVAF ( 12.42%,5years)-4730 i.e 20375.08

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