Sister Pools sells outdoor swimming pools and currently has an aftertax cost of capital of 10.6 percent. Al's Construction builds and sells water features and fountains and has an aftertax cost of capital of 10.2 percent. Sister Pools is considering building and selling its own water features and fountains. The initial cash outlay for this project would be $75,000. The expected net cash inflows are $18,000 a year for seven years. What is the net present value of the Sister Pools project?

Question

Quizplus · Accepted Answer

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

Using a financial calculator or spreadsheet, we can calculate the present value of the expected net cash inflows as follows:

PV = $18,000 * [(1 - 1 / (1 + 10.6%)^7) / 0.106] = $98,283

Next, we calculate the NPV by subtracting the initial cash outlay from the present value of the net cash inflows:

NPV = $98,283 - $75,000 = $23,283

Since the NPV is positive, the Sister Pools project is expected to generate positive returns and is therefore a good investment opportunity. The best choice is B.

Sister Pools Sells Outdoor Swimming Pools and Currently Has an Aftertax