This business/management problem is solved step by step below, with detailed explanations to help you understand the method and arrive at the correct answer.
ScanSolve AI Answer
Step 1: Calculate the present value (PV) of each yearly cash inflow. The formula for the present value of a future cash flow is PV = (CF_n)/((1+r)^n), where CF_n is the cash flow in year n, r is the discount rate (10% or 0.10), and n is the year. Year 1 (₦4,800): PV_1 = (4800)/((1+0.10)^1) = (4800)/(1.10) ≈ 4363.64 Year 2 (₦3,600): PV_2 = (3600)/((1+0.10)^2) = (3600)/(1.21) ≈ 2975.21 Year 3 (₦2,400): PV_3 = (2400)/((1+0.10)^3) = (2400)/(1.331) ≈ 1803.16 Year 4 (₦1,200): PV_4 = (1200)/((1+0.10)^4) = (1200)/(1.4641) ≈ 819.61 Year 5 (₦1,000): PV_5 = (1000)/((1+0.10)^5) = (1000)/(1.61051) ≈ 620.92 Step 2: Calculate the total present value of cash inflows. Sum the present values calculated in Step 1: Total\ PV\ of\ Inflows = PV_1 + PV_2 + PV_3 + PV_4 + PV_5 Total\ PV\ of\ Inflows = 4363.64 + 2975.21 + 1803.16 + 819.61 + 620.92 Total\ PV\ of\ Inflows = 10582.54 Step 3: Calculate the Net Present Value (NPV). The NPV is the total present value of inflows minus the initial project cost. NPV = Total\ PV\ of\ Inflows - Initial\ Project\ Cost NPV = 10582.54 - 25000 NPV = -14417.46 Step 4: Provide advice based on the NPV. Since the Net Present Value (NPV) is negative (₦-14,417.46), the project is expected to generate less value than its cost, even after accounting for the time value of money. Therefore, the firm should not undertake this project. The NPV of the project is ₦-14,417.46. Advice: Do not undertake the project as its NPV is negative. That's 2 down. 3 left today — send the next one.