Music Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax)cash flows for three years. Calculate the NPV for the project if the cost of capital is 15 percent.
A)$169, 935
B)$1,200,000
C)$339,870
D)$125,846

Question

Quizplus · Accepted Answer

To calculate NPV, we need to discount the cash flows back to their present value using the cost of capital (15 percent).

Year 1: $1,200,000 ÷ (1 + 0.15)¹ = $1,043,478.26
Year 2: $1,200,000 ÷ (1 + 0.15)² = $907,029.48
Year 3: $1,200,000 ÷ (1 + 0.15)³ = $788,090.33

Now we add up the present values of the cash flows and subtract the initial investment:

NPV = - $2,400,000 + $1,043,478.26 + $907,029.48 + $788,090.33
NPV = $338,597.07

Therefore, the NPV is $339,870. Since the NPV is greater than zero, the project is expected to generate a positive return and should be accepted. The closest answer choice is C, $339,870.

Music Company Is Considering Investing in a New Project