Little Giant is building a manufacturing plant that will require a cash outlay of $300,000 for the initial purchase of a building, $450,000 for remodeling the first year, and $710,000 for new equipment in the second year. If the firm's cost of capital is 12 percent, what is the present value of the net investment at time 0?

Question

Quizplus · Accepted Answer

The present value of the net investment is calculated by discounting each cash outlay to time 0 using the cost of capital (12%). The formula for present value is PV = FV / (1 + r)^n. Calculate the present value for each cash outlay and sum them: $300,000 (already at time 0) + $450,000 / (1.12)^1 + $710,000 / (1.12)^2 = $1,267,720.

Little Giant Is Building a Manufacturing Plant That Will Require