Woodstock Inc. expects to own a building for five years, then sell it for $1,500,000 net of taxes, sales commissions and other selling costs. Woodstock's cost of capital is 11%. How much will the sale of the building contribute to the NPV of the project?
A) $890,177
B) $1,351,351
C) $1,500,000
D) $2,527,587

Question

Quizplus · Accepted Answer

The sale of the building contributes to the NPV of the project by discounting the future sale price back to its present value using the cost of capital as the discount rate. The formula for present value (PV) is PV = FV / (1 + r)^n, where FV is the future value ($1,500,000), r is the discount rate (11% or 0.11), and n is the number of periods (5 years). Plugging in the values, we get PV = $1,500,000 / (1 + 0.11)^5 = $1,500,000 / 1.685058 = $890,177.