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16 August, 09:41

An auto-parts company is deciding whether to sponsor a racing team for a cost of $500000. The sponsorship would last for 5 years and is expected to increase cash flows by $150000 per year. If the discount rate is 7%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship

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  1. 16 August, 09:50
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    Answer: The answer is $115,029.61

    Explanation: We will be calculating this question using the Net Present Value (NPV) formula, thus:

    NPV = - Co + C1 / (1 + r) + C2 / (1 + r) ^2 + ... + Ct / (1 + r) ^t

    Where:

    Co = initial investment

    C = cashflow

    r = discount rate

    t = time

    NPV = - 500,000 + 150,000 / (1 + 0.07) + 150,000 / (1 + 0.07) ^2 + 150,000 / (1 + 0.07) ^3 + 150,000 / (1 + 0.07) ^4 + 150,000 / (1 + 0.07) ^5

    = - 500,000 + 140,186.91 + 131,015.81 + 122,444.68 + 114,434.28 + 106,947.93

    = $115,029.61
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