You are the financial manager of a firm that is contemplating investing in a new

Question

You are the financial manager of a firm that is contemplating investing in a new project that you expect will generate cash flows of $10,000 per year for five years and then $15,000 per year for another two years. At the end of seven years you expect to sell the project's assets for $50,000. You believe that you should earn at least 14% to compensate the shareholders for the project's risk.

What is the present value of the project's terminal value?

What is the most that you should pay for this project?

Is this project consistent with the firm's goal assuming you can invest $25,000 in this project?

What is the primary goal of the firm?

Explanation / Answer

Ans-

1) present value of the project's terminal value(50000*0.4)$20000

2) most that you should pay for this project is $67145

3) Is this project consistent with the firm's goal assuming you can invest $25,000 in this project? the firm primary goal is the maximazation of wealth & earn high rate of return.

Year Cash Inflow ($) DF @14% PV of cashflow ($) 1 10000 0.877 8770 2 10000 0.769 7690 3 10000 0.675 6750 4 10000 0.592 5920 5 10000 0.519 5190 6 15000 0.455 6825 7 15000 0.4 6000 Total 47145 Add-Pv of terminal cash flow 20000 Total inflow 67145

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