Wet and Wild Water Company drills small commercial water wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below. What is the net present value of the investment? Assume there is no recovery of working capital.

Question

Wet and Wild Water Company drills small commercial water wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below.  What is the net present value of the investment? Assume there is no recovery of working capital.

Quizplus · Accepted Answer

To calculate the net present value, we need to discount the cash flows at the given rate (12%).

- Cash outflow: $250,000 (initial cost)
- Cash inflows: 
   - Year 1: $50,000
   - Year 2: $80,000
   - Year 3: $120,000
   - Year 4: $200,000
   - Year 5: $240,000

Using a financial calculator or a spreadsheet, the net present value is calculated as $20,672. This means that the present value of the cash inflows is greater than the initial cost, and the investment is expected to be profitable. Therefore, the best choice is to proceed with the investment (option B).

Wet and Wild Water Company Drills Small Commercial Water Wells