You want to set up a new private business. The new business will generate a net cash inflow of $106,000 for the firm during the first year, and the cash flows are projected to grow at the rate of 4% per year forever. The project require the initial investment of $1,590,000.a) What is the NPV if the required return is 10%?b) At 10% return, should the company accept or reject the project?c) The company is unsure about the assumption of a growth rate of 4% in its cash flows. At what constent growth rate will the company break even, if it stll require a return of 10% on its investment.*Constent Growth Rate?

Question
Asked Mar 6, 2019
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You want to set up a new private business. The new business will generate a net cash inflow of $106,000 for the firm during the first year, and the cash flows are projected to grow at the rate of 4% per year forever. The project require the initial investment of $1,590,000.

a) What is the NPV if the required return is 10%?

b) At 10% return, should the company accept or reject the project?

c) The company is unsure about the assumption of a growth rate of 4% in its cash flows. At what constent growth rate will the company break even, if it stll require a return of 10% on its investment.

*Constent Growth Rate?

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Expert Answer

Step 1

NPV is defined as the difference between present value of cash inflows and present value of cash outflow of project.

Conclusion :- a). NPV of project = $ 176666.67 (approx).

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Step 2

b). The company should accept the project at the 10 % rate of return because the NPV of project is positive i.e., ...

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