Cortez Art Gallery is adding to its existing buildings at a cost of $2 million.
ID: 2633023 • Letter: C
Question
Cortez Art Gallery is adding to its existing buildings at a cost of $2 million. The gallery expects to bring in additional cash flows of $520,000, $700,000, and $1,000,000 over the next three years. Given a required rate of return of 10 percent, what is the NPV of this project?
McKenna Sports Authority is getting ready to produce a new line of gold clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $817,500, and $1,230,000 over the next three years. What is the payback period for this project?
Explanation / Answer
Cortez Art Gallery is adding to its existing buildings at a cost of $2 million. The gallery expects to bring in additional cash flows of $520,000, $700,000, and $1,000,000 over the next three years. Given a required rate of return of 10 percent, what is the NPV of this project?
NPV = -2000000 + 520000/1.1 + 700000/1.1^2 + 1000000/1.1^3
NPV = - $ 197,445.53
Note: Since NPV is negative the project is not viable
McKenna Sports Authority is getting ready to produce a new line of gold clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $817,500, and $1,230,000 over the next three years. What is the payback period for this project?
Payback period for this project = 2 + 507500/1230000
Payback period for this project = 2.41 Year
Year Cash flow Cumulative 0 -1850000 -1850000 1 525000 -1325000 2 817500 -507500 3 1230000 722500