Aerospace Dynamics will invest $100,000 in a project that will produce the follo

ID: 2740931 • Letter: A

Question

Aerospace Dynamics will invest $100,000 in a project that will produce the following cash flows. The cost of capital is 15 percent. (Note that the fourth year’s cash flow is negative.) Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Year Cash Flow 1 $ 50,000 2 36,000 3 30,000 4 (27,000 ) 5 60,000

a. What is the net present value of the project? (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 project be undertaken? Yes No

Explanation / Answer

Present value factor = 1/(1+r)n, where r = cost of capital = 0.15 and n = year

Year

Cash flows

Present value factor

Present value of cash flows

$ 100,000

1 / 1.15^0

$ 100,000.00

$ 50,000

1 / 1.15^1

0.8696

$ 43,478.26

$ 36,000

1 / 1.15^2

0.7561

$ 27,221.17

$ 30,000

1 / 1.15^3

0.6575

$ 19,725.49

-$ 27,000

1 / 1.15^4

0.5718

-$ 15,437.34

$ 60,000

1 / 1.15^5

0.4972

$ 29,830.60

Net present value

$ 204,818.19

Hence, net present value = $204,818.19

Yes, Project should be undertaken because net present value is positive.