A new grocery store requires $50 million in initial investment.You estimate that the store will generate $5 million of after-tax cash flow each year for five years.At the end of five 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

Using the formula for NPV, we can calculate:

NPV = -50 + (5/(1.1)^1) + (5/(1.1)^2) + (5/(1.1)^3) + (5/(1.1)^4) + (5/(1.1)^5) + (55/(1.1)^5)

NPV = -50 + 3.94 + 3.58 + 3.25 + 2.95 + 2.68 + 34.2

NPV = $3.1 million

Therefore, choice C is the best answer. The NPV is positive, meaning that the project is expected to generate more cash flow than the initial investment, even when taking into account the time value of money.

A New Grocery Store Requires $50 Million in Initial Investment