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Crystal Industries is considering an expansion project with cash flows of -$325,000, $167,500, $216,100, $104,500, and -$92,700 for years 0 through 4. Should the firm proceed with the expansion based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent

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anthougo

Answer:

Crystal Industries

NPV = $7,1005.51

The firm should proceed with the expansion because the project will yield a positive net present value.

Explanation:

a) Data and Calculations:

Discount rate = 13.4%

Discount factor  = 1/(1 + r)∧n

Calculation of the Net Present Value:

Years   Cash flows   Discount Factor  Present value  

0           -$325,000     1                          -$325,000.00      

1              $167,500    0.8818                        147,701.50

2             $216,100     0.7776                     168,039.36

3            $104,500     0.7001                        73,160.45

4            -$92,700      0.6174                     -56,800.80

NPV =                                                            $7,100.51

b) Crystal's net present value (NPV) is the difference between the present value of its cash inflows and the present value of its cash outflows over the project's 4 years.  The NPV is usually determined in capital budgeting and investment planning as a financial evaluation tool when analyzing the positivity of a project's cash flows.  It discounts the future cash flows to today's dollar values, taking into consideration the time value of money.

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