Question

Sister Pools sells outdoor swimming pools and currently has an aftertax cost of capital of 10.6 percent. Al's Construction builds and sells water features and fountains and has an aftertax cost of capital of 10.2 percent. Sister Pools is considering building and selling its own water features and fountains. The initial cash outlay for this project would be $75,000. The expected net cash inflows are $18,000 a year for seven years. What is the net present value of the Sister Pools project?

Answer 1

Answer:

The net present value of the Sister Pools project is $12,057

Explanation:

Net Present value = Present value of cash inflows - Present value of cash outflows

Net Present value = $18,000 * PVAF (10.2%, 7 years) - $75,000

Net Present value = $18,000 * 4.8365 - 75,000

Net Present value = $87,057 - $75,000

Net Present value = $12,057

Note: The cost of capital is taken for similar business when a new business is started