Babcock Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.
A) $54.62
B) $57.49
C) $60.52
D) $63.54

Question

Babcock Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. 
A) $54.62 
B) $57.49 
C) $60.52 
D) $63.54

Quizplus · Accepted Answer

To calculate the project's NPV, we need to discount each cash flow by the company's weighted average cost of capital (WACC), which is 10%.

The formula for NPV is:

NPV = CF1 / (1+WACC)^1 + CF2 / (1+WACC)^2 + ... + CFn / (1+WACC)^n

Where CF represents the cash flow for each year and n represents the number of years.

Using the formula for this project, we get:

NPV = -$200,000 / (1+0.10)^1 + $70,000 / (1+0.10)^2 + $80,000 / (1+0.10)^3 + $90,000 / (1+0.10)^4 + $100,000 / (1+0.10)^5

NPV = -$200,000 / 1.10 + $70,000 / 1.21 + $80,000 / 1.331 + $90,000 / 1.4641 + $100,000 / 1.61051

NPV = -$181,818.18 + $57,851.24 + $60,111.81 + $61,471.35 + $62,528.94

NPV = $60,144.16

Therefore, the project's NPV is $60,144.16, which is positive and indicates that the project should be accepted.

The correct answer is C.