Injection Aluminium Mines, Inc. is considering adoption of a new project requiri
ID: 2739180 • Letter: I
Question
Injection Aluminium Mines, Inc. is considering adoption of a new project requiring a net investment of $10 million. The project is expected to generate 5 years of net cash inflows of $5 million per year. In the project's sixth, and final year, it is expected to have a net cash outflow of $1 million. What is the project's risk adjusted net present value? The company's cost of capital is 7% but projects of this nature are usually judged by a risk adjusted rate that is 5% higher than cost of capital
Explanation / Answer
The discount rate to be used as per the company policy = 7% + 5% = 12% risk adjusted rate
Year cashflow PVF@12% Discounted cashflow 0 - $10 million 1 -$10 million 1 $ 5 million 0.8928 $4.464 million 2 $ 5 million 0.7972 $3.986million 3 $ 5 million 0.7118 $3.559million 4 $ 5 million 0.6355 $3.1775million 5 $ 5 million 0.5674 $2.837million 6 $ 1 million 0.5066 $0.5066million NPV = $8.5301 million