Question

Sister Pools sells outdoor swimming pools and currently has an aftertax cost of capital of 11.6 percent. Al's Construction builds and sells water features and fountains and has an aftertax cost of capital of 10.3 percent. Sister Pools is considering building and selling its own water features and fountains. The sales manager of Sister Pools estimates that the water features and fountains would produce 20 percent of the firm's future total sales. The initial cash outlay for this project would be $85,000. The expected net cash inflows are $17,000 a year for 7 years. What is the net present value of the Sister Pools project?

Answer 1

Answer:

NPV -6,422.07908

The investment is not profitable at current cost of capital os 11.6%

Explanation:

Sister Pools 11.6% after tax cost of capital

Contructions 10.3% after tax cost of capital

- 85,000

cash flow 17,000 for next 7 years

We will calculate the present value of a 7-years annuity of 17,000 at 11.6% rate

We use Sister Pools rate because we are asked for this company and there is no indication about a change in the cost of capital condition.

$C \times \frac{1-(1+r)^{-time} }{rate} = PV\\\\\\\\17,000 \frac{1-(1+0.116)^{-7} }{0.116} = PV$

PV = 78,577.92092

Next we subtract the investment cost to get the Net Present Value

78,577.92092 - 85,000 = -6,422.07908