The Quick-Start Company has the following pattern of potential cash flows with its planned investment in a new cold weather starting system for fuel injected cars.

If the company has a discount rate of $17 \%$, should it decide to invest?

Question

The Quick-Start Company has the following pattern of potential cash flows with its planned investment in a new cold weather starting system for fuel injected cars.

If the company has a discount rate of $17 \%$, should it decide to invest?

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the investment, we need to discount each year's cash flow and then sum them up. Using a discount rate of 17%, we get the following NPV:
NPV = -11 + 4/(1+0.17) + 6/(1+0.17)^2 + 12/(1+0.17)^3 + 12/(1+0.17)^4 + 12/(1+0.17)^5
= €21.6 million
Since the NPV is positive, the company should decide to invest. Therefore, the correct answer is B.

The Quick-Start Company Has the Following Pattern of Potential Cash 17%17 \%17%

The Quick-Start Company Has the Following Pattern of Potential Cash $17 \%$