Warnock Inc is considering a project that has the following cash flow and WACC Data What is the projects NPV ?note THAT a projects NPV Can be negative in which case it will be rejected .
WACC 10.00%
year 0 1 2 3
Cash Flows -825 500 400 300
I get C but i am having doubts about my answer can you help me.
I do not know what answer C represents, but you could work out according to the example given in
http://www.jiskha.com/display.cgi?id=1248867678
and make the correct choice.
I got 60.52 as well. I added up all of the present values.
To calculate the net present value (NPV) of the project, we need to discount each cash flow to its present value at the given WACC of 10% and then sum up these present values.
To calculate the present value of each cash flow:
Year 0: Present value = -825
Year 1: Present value = 500 / (1 + 0.10)^1
Year 2: Present value = 400 / (1 + 0.10)^2
Year 3: Present value = 300 / (1 + 0.10)^3
Now, we can calculate the NPV by summing up these present values:
NPV = -825 + (500 / (1 + 0.10)^1) + (400 / (1 + 0.10)^2) + (300 / (1 + 0.10)^3)
Simplifying this calculation would give you the projects NPV.
To calculate the net present value (NPV) of a project, you need to discount the cash flows using the weighted average cost of capital (WACC). The WACC represents the average rate of return required by the company's investors.
In this case, the given WACC is 10.00%, which means that the discount rate is 10.00%.
To calculate the NPV, you need to discount each cash flow to its present value and then sum them up. The formula for calculating the present value of each cash flow is:
PV = CF / (1 + r)^n
Where:
PV = Present Value
CF = Cash Flow
r = Discount Rate (WACC)
n = Time period
Let's calculate the present value for each cash flow:
Year 0:
PV0 = -825 / (1 + 0.10)^0 = -825
Year 1:
PV1 = 500 / (1 + 0.10)^1 = 500 / 1.10 = 454.55
Year 2:
PV2 = 400 / (1 + 0.10)^2 = 400 / 1.21 = 330.58
Year 3:
PV3 = 300 / (1 + 0.10)^3 = 300 / 1.331 = 225.56
Now, sum up the present values to calculate the NPV:
NPV = PV0 + PV1 + PV2 + PV3
= -825 + 454.55 + 330.58 + 225.56
= 185.69
Since the NPV is positive (185.69), the project is deemed acceptable. If the NPV were negative, the project would be rejected.
Thus, in this case, the projects NPV is positive (185.69).