A new grocery store cost $50 million in initial investment. It is estimated that the store will generate $5 million after-tax cash flow each year for five years. At the end of 5 years it can be sold for $60 million. What is the NPV of the project at a discount rate of 10%?

Question

Quizplus · Accepted Answer

To find the NPV, we need to discount each year's after-tax cash flow and the final sale value, and then subtract the initial investment.

Year 1:
$5 million / (1 + 0.1)^1 = $4.55 million
Year 2:
$5 million / (1 + 0.1)^2 = $4.13 million
Year 3:
$5 million / (1 + 0.1)^3 = $3.76 million
Year 4:
$5 million / (1 + 0.1)^4 = $3.42 million
Year 5:
$5 million + $60 million / (1 + 0.1)^5 = $48.2 million

NPV = -$50 million + $4.55 million + $4.13 million + $3.76 million + $3.42 million + $48.2 million 
NPV = $13.06 million

Therefore, the best choice is C, as it gives the closest NPV to $13.06 million.

A New Grocery Store Cost $50 Million in Initial Investment