A firm is considering an investment project that requires an initial outlay of $10,000,000. The project is expected to provide net cash flows of $6,500,000 in year 1, $3,000,000 in year 2, $3,000,000 in year 3 and $1,000,000 in year 4.

(a) What is the net present value (NPV) for the project if its cost of capital is 15%? What does the NPV value represent with respect to the firm's shareholders?

(b) What is the profitability index (PI) for the project? What is the relationship between the Pl and the NPV?

(c) "Evidence suggests that in spite of the theoretical superiority of NPV, financial managers use the internal rate of return (IRR) approach just as often as the NPV method."

Discuss the above statement.

Answer rating: 100% (QA)

a Net Present Value NPV Calculation 1 Calculate the present value of each years cash flow Year 1 cas... View the full answer