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 6,495 dollars and then produce an expected cash flow of 12,632 dollars in 7 years. Project A has an internal rate of return of 9.969 percent. The weighted-average cost of capital for Litchfield Design is 8.44 percent and the weighted-average cost of capital for Oxygen Optimization is 10.13 percent. What is the NPV that Oxygen Optimization would compute for project A?

Explanation / Answer

NPV = PV of Cash Inflows - PV of Cash Outflows

Calculation of NPV:

NPV = -$66.5752

Year Cash Flow PVF (10.13%) PV of Cash Flow 0 -$6495 1 -$6495 7 $12632 0.5089 $6428.4248 -$66.5752

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