NPV Worked Solution Exercise Prof. B. Croitoru McGill MBA Japan (MGCR 651) Managing Resources - Finance This exercise provides you with an opportunity to gain a better understanding of the Net Present Value. This exercise is not a test, and your answer does not need to be perfect. As long as you make a serious, individual attempt at answering all the questions below, you will get full credit on this assignment. Please work on the questions below and record all of your workings in writing. Save your worked solutions as and submit to the Worked Solution Assignment in myCourses before the deadline. The timely submission of this assignment is worth 5% of you course grade.

Consider a project that would yield after-tax revenues of $100,000/year for 3 years, and costs $275,000 today to invest in. The interest rate offered in the financial market is 5%.

1. Compute the Net Present Value (NPV) of this project in the space below.

2a. Describe an investment strategy in the financial market that will bring the same future cash flows as the project.

2b. How much money will you need to invest in the financial market to achieve the same future cash flows as the project?

3. What is the difference between the cost of the investment strategy you determined in question 2 above and the initial cost of investing in the project?

4. Compare the numbers you found in questions 1 and 3 above. Based on this comparison, can you interpret and explain the meaning of the Net Present Value results? Write your ideas below.

Keep in mind our main goal when we examine projects: comparing investing in a project vs. investing the same amount of money in the financial market, and determine whether or not it is worthwhile to invest in the project.

In particular, when you find that the NPV of a project is negative, what does this tell you about the project?