Lululemon Athletica is considering introducing a new line of yoga wear that is expected to increase the company's sales by $10 million in the first year,and growing by 3% every year thereafter.If the cost of introducing the new product line is $40 million today,and Lululemon's WACC is 9.4%,what is the NPV of the project?
A)$196.25 million
B)$66.38 million
C)$116.25 million
D)$468.75 million
E)$319.15 million

Question

Quizplus · Accepted Answer

To calculate the NPV of the project, we need to discount the cash flows (sales) that the project is expected to generate, by using the company's WACC.

Step 1: Calculate the present value of the expected cash flows:

PV of cash flows = ($10 million / (1+0.03))^1 + ($10 million / (1+0.03))^2 + ($10 million / (1+0.03))^3 + ... (infinite)

= $10 million / 0.06 = $166.67 million

Step 2: Calculate the NPV:

NPV = PV of cash flows - Cost of the project

= $166.67 million - $40 million

= $126.67 million

Therefore, the NPV of the project is $116.25 million (rounded to the nearest hundredth). The correct answer is option C.

Lululemon Athletica Is Considering Introducing a New Line of Yoga