11 May The objective of a firm is to maximize shareholder wealth. The Net Present Value (NPV) method is one of the useful methods that help financial managers to maximize shareholders’ wealth. Suppose the company that you selected for the Module 1 SLP is considering a new project that will have an initial cash outflow of $125,000,000. The project is expected to have the following cash inflows: Year Cash Flow ($) 1 2,000,000 2 3,500,000 3 13,500,000 4 89,750,000 5 115,000,000 6 120,000,000 If the project’s cost of capital (discount rate) is 12.5%, what is the project’s NPV? Should the project be accepted? Why or why not? You may use the following steps to calculate NPV: 1. Calculate present value (PV) of cash inflow (CF) PV of CF = CF1 / (1+r)^1 + CF2 / (1+r)^2 + CF3 / (1+r)^3 + CF4 / (1+r)^4 + CF5 / (1+r)^5 + CF6 / (1+r)^6 Where the CFs are the cash flows and r = the project’s discount rate.
cth. The Net Present Value (NPV) method is one of the useful methods that help financial managers to maximize shareholders’ wealth.
Suppose the company that you selected for the Module 1 SLP is considering a new project that will have an initial cash outflow of $125,000,000. The project is expected to have the following cash inflows:
Year Cash Flow ($)
1 2,000,000
2 3,500,000
3 13,500,000
4 89,750,000
5 115,000,000
6 120,000,000
If the project’s cost of capital (discount rate) is 12.5%, what is the project’s NPV? Should the project be accepted? Why or why not?
You may use the following steps to calculate NPV:
1. Calculate present value (PV) of cash inflow (CF)
PV of CF = CF1 / (1+r)^1 + CF2 / (1+r)^2 + CF3 / (1+r)^3 + CF4 / (1+r)^4 + CF5 / (1+r)^5 + CF6 / (1+r)^6
Where the CFs are the cash flows and r = the project’s discount rate.
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