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

Question

Business

Jasmine Gamble

25 October, 18:50

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

+4

Answers (1)

Know the Answer?

Maggie Taylor · Answer 1

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