Question

several companies, including barnyard and energy solutions corporation, are considering project a, which is believed by all to have a level of risk that is equal to that of the average-risk project at barnyard. project a is a project that would require an initial investment of $77,700 and then produce an expected cash flow of $100,600 in 2 years. project a has an internal rate of return of 8.79 percent. the weighted-average cost of capital for barnyard is 10.25 percent and the weighted-average cost of capital for energy solutions corporation is 5.81 percent. what is the npv that energy solutions corporation would compute for project a? $12155.48 (plus or minus $10) $5063.87 (plus or minus $10) $7300.22 (plus or minus $10) $160463.87 (plus or minus $10) none of the above is within $10 of the correct answer

Answer 1

The net present value (NPV) that Energy Solutions Corporation would compute for Project A is a) $12155.48 (plus or minus $10).

What is the net present value (NPV)?

The net present value is the difference between the present values of cash inflows and cash outflows.

The present value is the discounted future value of cash flows.

Discounting future cash flows brings them to their present-day value.

The present value can be computed using an online finance calculator as follows.

N (# of periods) = 2 years

I/Y (Interest per year) = 5.81%

PMT (Periodic Payment) = $0

FV (Future Value) = $100,600

Results:

PV = $89,855.48

Total Interest = $10,744.52

Initial investment cost = $77,700

Net present value (NPV) = $12,155.48 ($89,855.48 - $77,700)

Thus, since Energy Solutions' weighted-average cost of capital is 5.81%, its computed NPV is $12,155.48.

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