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? (Do not round intermediate computations. Round final answer to nearest million dollars.)
A) $10 million
B) $12 million
C) $14 million
D) $16 million

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount the cash flows back to their present value. Using a 20% discount rate, the present value factors are:

Year 1: 1 / (1 + 0.20)^1 = 0.8333
Year 2: 1 / (1 + 0.20)^2 = 0.6944
Year 3: 1 / (1 + 0.20)^3 = 0.5787

Now, we can calculate the present value of each cash flow:

Year 1: $13,000,000 x 0.8333 = $10,832,900
Year 2: $23,000,000 x 0.6944 = $15,968,200
Year 3: $29,000,000 x 0.5787 = $16,760,130

The sum of these present values is $43,561,230. Subtracting the initial investment of $30,000,000, we get an NPV of $13,561,230. Rounded to the nearest million, the answer is choice C, $14 million. Therefore, this project is a good investment because it has a positive NPV.