Question

Snowbound Tours is considering investing $5,650,000 in a new lodge on the Tanana River. Management projects 15 years of cash flows per the chart below. Using a discount rate of 9.65%, management should:_______.
Year Cash Flow Year Cash Flow
1 260,000 9 980,000
2 340,000 10 965,000
3 505,000 11 920,000
4 610,000 12 890,000
5 790,000 13 840,000
6 1,200,000 14 720,000
7 1,295,000 15 690,000
8 1,110,000
A. Accept the project
B. Reject the project
C. Be indifferent to the project

Answer 1

Answer:

A. Accept the project

Explanation:

For deciding whether the project should be accepted or rejected we need to determine the net present value

Year          cash flows            PV factor at 9.65%      Present value

0               -$5,650,000              1                                -$5,650,000

1                 $260,000               0.9120                         $237,118.10

2               $340,000               0.8317                          $282,788.44          

3               $505,000              0.7585                         $383.058.82

4               $610,000               0.6918                         $421,983.33

5              $790,000              0.6309                        $498,406.75

6             $1,200,000           0.5754                         $690,445.54

7             $1,295,000           0.5247                         $679,531.07

8             $1,110,000            0.4786                        $531,194.89

9             $980,000           0.4364                         $427,708.96

10            $965,000           0.3980                        $384,097.03

11            $920,000           0.3630                      $333,958.75

12           $890,000           0.3311                        $294,636.38        

13           $840,000            0.3019                      $253,610.38

14           $720,000           0.2753                      $198,249.27

15          $690,000            0.2511                       $173,268.47

Net present value                                              $140,056.19

Since the net present value comes in positive so the project should be accepted