Strange Manufacturing Company is purchasing a production facility at a cost of $21 million. The firm expects the project to generate annual cash flows of $7 million over the next five years. Its cost of capital is 18 percent. What is the net present value of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)

Question

Quizplus · Accepted Answer

The correct answer is A. The net present value of the project is $890,197. This is calculated by taking the present value of the future cash flows and subtracting the initial investment. The present value of the future cash flows is calculated by multiplying each cash flow by the present value factor for the corresponding year. The present value factor is calculated by dividing 1 by (1 + r)^n, where r is the cost of capital and n is the number of years. In this case, the cost of capital is 18% and the number of years is 5. The present value of the future cash flows is $26,705,882. The initial investment is $21 million. Therefore, the net present value of the project is $26,705,882 - $21 million = $890,197.

Strange Manufacturing Company Is Purchasing a Production Facility at a Cost