Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the net present value of this project

The net present value of this project is $13,587,962.96

Explanation:

The Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows  from a decision. A positive NPV indicates a profitable investment and a negative the opposite.

We can be work out the NPV of Turnbull Corp as follows

                                                            Present Value

Year 1       13000,000× *(1.2^(-1)  = 10,833,333.3

Year 2     23,000,000 × 1.2^(-2) =   15,972,222.22

Year 3    29,000,000 ×  1.2^( -3) =   16,782,407.41

Total PV of cash inflows                   43,587,963.0

Less the PV of cash outflow              (30,000,000)

Net Present Value (NPV)                 13,587,962.96

The net present value of this project is $13,587,962.96

Net present value = $13,587,962.96

Explanation: Net Present Value (NPV) is the summation of all the discounted cash flow less the initial capital outlay. Net Present Value is used in making decision on a project to reject or accept it. A Project with positive NPV is accepted while a project with negative NPV is rejected

In arriving at the NPV, calculate the discounted cash flow using the discount rate of 20%

Year 0 = (30,000,000)

Year 1 = 10,833,333.33

Year 2 = 15,972,222.22

Year 3 = 16,782,407.41

Net present value is equal to $13,587,962.96

This project has a positive NPV as such it should be accepted.

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