Sister Pools sells outdoor swimming pools and currently has an aftertax cost of capital of 11.6 percent.Al's Construction builds and sells water features and fountains and has an aftertax cost of capital of 10.3 percent.Sister Pools is considering building and selling its own water features and fountains.The sales manager of Sister Pools estimates that the water features and fountains would produce 20 percent of the firm's future total sales.The initial cash outlay for this project would be $85,000.The expected net cash inflows are $17,000 a year for 7 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 by the aftertax cost of capital.

NPV = -Initial Cash Outlay + Present Value of Net Cash Inflows

NPV = -$85,000 + ($17,000/1.116 + $17,000/(1.116)^2 + ... + $17,000/(1.116)^7)

NPV = -$85,000 + $67,008.77

NPV = -$17,991.23

Therefore, the net present value of the project is -$17,991.23, which means the project would result in a negative return and should not be pursued. The best choice is B.

Sister Pools Sells Outdoor Swimming Pools and Currently Has an Aftertax