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 $55 million. What is the NPV of the project at a discount rate of 10%?

Question

Quizplus · Accepted Answer

To calculate NPV, we need to find the present value of all future cash flows and subtract the initial investment of $50 million. We can use the following formula:

NPV = (CF1 / (1+r)^1) + (CF2 / (1+r)^2) + ... + (CFn / (1+r)^n) - Initial Investment

Where CF is the cash flow, r is the discount rate, and n is the number of years.

CF1 = $5 million
CF2 = $5 million
CF3 = $5 million
CF4 = $5 million
CF5 = $60 million (after adding the sale price of $55 million and the last year's cash flow of $5 million)
Initial Investment = -$50 million (negative because it is an outflow)

Plugging in the numbers, we get:

NPV = ($5 million / (1+0.1)^1) + ($5 million / (1+0.1)^2) + ($5 million / (1+0.1)^3) + ($5 million / (1+0.1)^4) + ($60 million / (1+0.1)^5) - $50 million
NPV = $3.1 million

Therefore, the best choice is C) $3.1 million.

A New Grocery Store Cost $50 Million in Initial Investment