Question
Northwestern College is building a new science building. The initial costs are $10 million once every year for the next four years. The first cash
Northwestern College is building a new science building. The initial costs are $10 million once every year for the next four years. The first cash outflow or expense is due one year from today and the last is due four years from today. The new science building will bring in an additional $3 million starting in Year 4 (i.e. four years from today). The additional revenue will grow at 1 percent per year for the next 20 years starting from Year 4. Assume the interest rate is 5 percent. (a) What is the correct interest rate to use for the initial costs (i.e. cash outflows)? Express your answer as a percentage rounded to two decimal places. (i.e. 6.538% would round to 6.54%) (3 points) (b) How many cash inflows are there in the NPV calculation? Express your answer as an integer. (2 points) (c) What is the present value of cash outflows of this project? Your answer should be expressed in the millions of dollars. DO NOT use a dollar sign, and keep three digits after the decimal point. (4 points) (d) What is the present value of cash inflows of this project? Your answer should be expressed in the millions of dollars. DO NOT use a dollar sign, and keep three digits after the decimal point. (4 points) (e) Should the new science building be built according to the NPV rule? Your answer should be either Y or N without the quotation mark. (2 points)
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