A car parts company is deciding whether to sponsor a racing team for a cost of $2 million. The sponsorship would last for four years and is expected to increase cash flows by $610 000 per year. If the discount rate is 6.75%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship?

Question

Quizplus · Accepted Answer

The change in value is calculated using the Net Present Value (NPV) formula. The NPV of the cash flows is $2,077,914, and subtracting the initial cost of $2 million gives a change in value of $77,914.

A Car Parts Company Is Deciding Whether to Sponsor a Racing