Use the following information to answer the next question(s).
Sunny Flowers is considering the purchase of a small business that costs $500,000. Sunny plans to sell stock valued at $250,000. The stock would pay dividends of $20,000 per year. Sunny would borrow the remaining $250,000 from a local bank at 12 percent interest.
The business is expected to generate annual cash inflows of $80,000. Duane plans to operate the business for 15 years and then turn it over to his son.
-Using the cost capital as the discount rate, the net present value of the project is
A) $89,360.
B) $108,480.
C) $114,680.
D) $228,180.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the expected cash inflows at the cost of capital and subtracting the initial investment. The cost of capital here is the weighted average of the cost of equity (dividends) and the cost of debt (interest). The NPV calculation involves finding the present value of the $80,000 annual cash inflows over 15 years and subtracting the initial $500,000 investment.

Use the Following Information to Answer the Next Question(s)