Question

Bottleneck Industries is considering project A. The project has expected cash flows of -$29,500.00 today, $40,100.00 in 1 year, -$49,000.00 in 2 years, and $60,300.00 in 3 years. The weighted-average cost of capital for Bottleneck Industries is 26.43 percent. Which one of the following assertions is true?

A. The NPV of project A equals an amount that is less than or equal to $4.70.
B. The NPV of project A equals an amount that is equal to or greater than $4.70. C. Even though project A's expected cash flows are not conventional and even though it is possible to compute the NPV of a project with expected cash flows that are not conventional, the NPV of project A can not be computed D. The NPV of project A cannot be computed, because the project's expected cash flows are not conventional and it is impossible to compute the NPV of a project with expected cash flows that are not conventional E. The NPV of project A equals an amount that is greater than $4.70 but less than $4.70.

Answer 1

The project has expected cash flows for project A in years:

Year 0: -$29,500.00

Year 1: $40,100.00

Year 2: -$49,000.00

Year 3: $60,300.00

Using Weighted average cost of capital (WACC) formula:

PV0 = -$29,500.00 / (1 + 0.2643)^0 = -$29,500.00

PV1 = $40,100.00 / (1 + 0.2643)^1 = $31,727.51

PV2 = -$49,000.00 / (1 + 0.2643)^2 = -$27,488.59

PV3 = $60,300.00 / (1 + 0.2643)^3 = $31,930.80

Now we can calculate Net present value (NPV)

NPV = PV0 + PV1 + PV2 + PV3

= -$29,500.00 + $31,727.51 - $27,488.59 + $31,930.80

= $6,669.72

The NPV of project A is $6,669.72.

B. The NPV of project A equals an amount that is equal to or greater than $4.70 is the correct answer.