FIN 501 Applying Various Capital Budgeting Methodologies/TUTORIALOUTL FIN 501 Applying Various Capital Budgeting Methodo

FIN 501 Applying Various Capital Budgeting
Methodologies
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Applying Various Capital Budgeting Methodologies
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