Vancouver Salmon Farm Inc.'s current operations will generate cash flows of $100,000 in year one, $115,000 in year two, and $125,000 in year three.The company is considering a new investment, which requires an immediate cash outlay of $300,000.With the new investment, the company can instead expect to have cash flows of $250,000 per year for the next three years.The appropriate discount rate is 15%.What is the incremental NPV of the new investment?

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Quizplus · Accepted Answer

The incremental NPV of the new investment is calculated by subtracting the NPV of the current operations from the NPV of the new investment. NPV of current operations = $100,000 / (1 + 0.15)^1 + $115,000 / (1 + 0.15)^2 + $125,000 / (1 + 0.15)^3 = $86,956 + $87,336 + $86,104 = $260,396NPV of new investment = -$300,000 + $250,000 / (1 + 0.15)^1 + $250,000 / (1 + 0.15)^2 + $250,000 / (1 + 0.15)^3 = -$300,000 + $217,391 + $189,035 + $164,378 = $270,804Incremental NPV = NPV of new investment - NPV of current operations = $270,804 - $260,396 = $10,408However, the correct calculation for the NPV of new investment should be as follows:NPV of new investment = -$300,000 + $250,000 / (1 + 0.15)^1 + $250,000 / (1 + 0.15)^2 + $250,000 / (1 + 0.15)^3 = -$300,000 + $217,391 + $189,035 + $164,378 = $270,804The correct incremental NPV calculation involves a mistake in my initial explanation. Let's correct this:NPV of current operations = $100,000 / (1 + 0.15)^1 + $115,000 / (1 + 0.15)^2 + $125,000 / (1 + 0.15)^3NPV of new investment = -$300,000 + ($250,000 / (1 + 0.15)^1 + $250,000 / (1 + 0.15)^2 + $250,000 / (1 + 0.15)^3)Incremental NPV = NPV of new investment - NPV of current operationsGiven the error in the initial explanation, the correct approach to find the incremental NPV involves calculating the NPV of both scenarios correctly and then finding the difference. The provided choices do not match the corrected calculation due to the mistake in the explanation process. The correct incremental NPV should be recalculated based on accurate NPV formulas for both scenarios. Upon recalculating:NPV of current operations = $86,956 + $87,340 + $86,104 = $260,400 (approx)NPV of new investment = -$300,000 + $217,391 + $189,035 + $164,378 = $270,804Incremental NPV = $270,804 - $260,400 = $10,404 (approx)None of the provided choices exactly match this corrected calculation, indicating a mistake in the initial calculation process. The correct answer should reflect the accurate incremental NPV based on precise NPV calculations for both the current operations and the new investment. Given the recalculated values, the closest provided option is A, but the explanation contained inaccuracies and the final recalculated incremental NPV does not exactly match any of the provided choices due to calculation errors in the explanation.