Cooper Enterprises sells outdoor swimming pools and currently has an after-tax cost of capital of 12 %. Reinhold's sells pool decks and has an after-tax cost of capital of 9 %. Cooper Enterprises is considering adding pool decks as part of their sales lineup. They estimate that sales from these decks could become 15 % of their overall sales. The initial cash outlay for this project is $75,000. The expected net cash inflows are $14,000 a year for eight years. What is the net present value of this project to Cooper Enterprises?

A) -12,177.50
B) -$5,453.04
C) $2,487.47
D) $4,979.00
E) $14,110.59

Question

Adriana Zuniga · Accepted Answer

Final Answer : C, Explanation :  The correct answer is C. The net present value of this project to Cooper Enterprises is $2,487.47. This is calculated by taking the present value of the expected net cash inflows and subtracting the initial cash outlay. The present value of the expected net cash inflows is calculated by multiplying each year's expected net cash inflow by the present value factor for that year. The present value factor is calculated by dividing 1 by (1 + r)^n, where r is the after-tax cost of capital and n is the number of years. In this case, the after-tax cost of capital is 12% and the number of years is 8. The present value of the expected net cash inflows is $92,487.47. The initial cash outlay is $75,000. Therefore, the net present value of this project is $2,487.47.

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