In the chapter opener you learned that Johnson & Johnson’s weighted average cost of capital was around 6% but its investments were earning returns closer to 17%. In 2016, J&J invested about $3.2 billion in capital expenditures. Suppose J&J spends the same amount this year to expand its manufacturing facilities, and that investment produces a net cash flow of $544 million (17% of $3.2 billion) every year in perpetuity. Calculate the
To discuss:
To calculate the NPV.
Introduction:
The difference among the present value of cash inflows and the present value of cash outflows for a period of time is known as the Net Present value. NPV is utilized in capital budgeting as a criterion to analyze the profitability of projects.
Explanation of Solution
The NPV can be calculated as follows,
Since the NPV value is positive the projects creates a value worth $9,066.67 million.
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Chapter 9 Solutions
Principles of Managerial Finance, Student Value Edition (15th Edition) (The Pearson Series in Finance)
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