Shanghai Shipping is considering investing in a project that requires an after-tax initial investment of 156 million and is expected to produce after-tax cash inflows of $40 million for each of the next five years. The firm's cost of capital is 8%. Based on this information, the NPV of the project is _________ million and the firm should _________ the project.
A) $3.7; accept
B) -$3.7, reject
C) $159.37, accept
D) -$159.37, reject

Question

Quizplus · Accepted Answer

The NPV (Net Present Value) is calculated by discounting the future cash inflows at the firm's cost of capital and then subtracting the initial investment. Using the given data: NPV = -156 + 40/(1+0.08)^1 + 40/(1+0.08)^2 + 40/(1+0.08)^3 + 40/(1+0.08)^4 + 40/(1+0.08)^5 = $3.7 million (approximately). Since the NPV is positive, the firm should accept the project.

Shanghai Shipping Is Considering Investing in a Project That Requires