The Blue Moon is considering a 4 year project that requires an investment of $2.

Question

The Blue Moon is considering a 4 year project that requires an investment of $2.8m for new equipment. This equpiment will be depreciated SL to zero over the life of the project and will be worthless thereafter. The project is expected to produce cash inflows of $!m a year for 4 years. The firms WACC is 11.5%. Mgt uses this subjective approach for setting required returns for projects and has set the adjustment for this project at +1.5%. Should this project be accepted? Why/why not?

A) Yes the NPV is 174,471.33      B) Yes the NPV is 269,613.80    C) No The NPV is -11,408.19    D) No the NPV is - 128,358.58

Explanation / Answer

NPV = P.V. of cash inflow - P.V. of Cash outflow

   P.V. of cash inflow = 1000000 * Cumulative P.V. Factor @ 13 % for 4 Years

= 1000000 * 2.9744713 (approx)

= $ 2974471.30

   P.V. of Cash outflow = $ 2.8 Milion i.e. $ 2800000 (2.8 * 1000000)

NPV = 2974471.30 - 2800000

= $ 174471.30

The project should be accepted. The Right answer is option A). Yes the NPV is 174,471.33 (approx).

Conclusion:- A) Yes the NPV is 174,471.33

Note:- Discounting rate to be used for evaluating this project = 11.5 +1.5 = 13 % and One milion = 10 Lakhs.

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