Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the net present value of this project

NPV= $777,712.81

Explanation:

Giving the following information:

Initial investment= $8.5 million.

The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years.

Discount rate= 16%

To calculate the net present value, we need to use the following formula:

NPV= -Io + ∑[Cf/(1+i)^n]

Year 1= 2,000,000/1.16= 1,724,137.93

Year 2= 3,000,000/(1.16^2)= 2,229,488.70

Year 3= 4,000,000/(1.16^3)= 2,562,630.69

Year 4= 5,000,000/(1.16^4)= 2,761,455.49

Total= 9,277,712.81

NPV= -8,500,000 + 9,277,712.81= $777,712.81

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