Cooper Enterprises sells outdoor swimming pools and currently has an after-tax cost of capital of 12 percent. Reinhold's sells pool decks and has an after-tax cost of capital of 9 percent. Cooper
Enterprises is considering adding pool decks as part of their sales lineup. They estimate that sales
From these decks could become 15 percent of their overall sales. The initial cash outlay for this
Project is $75,000. The expected net cash inﬂows are $14,000 a year for eight years. What is the
Net present value of this project to Cooper Enterprises?

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the project, we need to discount the net cash inflows by the cost of capital.

First, we need to calculate the total net cash inflows over the life of the project:

Net cash inflow per year = $14,000 
Number of years = 8 
Total net cash inflow = $14,000 x 8 = $112,000

Next, we need to calculate the present value of the net cash inflows:

PV factor = (1 - (1 + r)^-n) / r 
where r = cost of capital and n = number of years

PV factor for Cooper Enterprises = (1 - (1 + 0.12)^-8) / 0.12 = 4.968

Present value of net cash inflows = Total net cash inflow x PV factor 
= $112,000 x 4.968 
= $557,616

Finally, we subtract the initial cash outlay from the present value of the net cash inflows to get the NPV:

NPV = Present value of net cash inflows - Initial cash outlay 
= $557,616 - $75,000 
= $482,616

Since the NPV is positive, the project is expected to generate a return that is greater than the cost of capital, making it a good investment for Cooper Enterprises.

Therefore, the best choice is C.

Cooper Enterprises Sells Outdoor Swimming Pools and Currently Has an After-Tax