Afirm is considering a simple investment project. if it goes forward, then the firm must pay $6 million now and $4 million in one year. two years from now the project is expected to pay back $5 million, and three years from now it is expected to pay back another $10 million. suppose that the firm’s opportunity cost of capital is 25%. (a) what is the present value of the project? (b) under what conditions should the firm do the project?

Explanation:

Giving the following information:

The firm must pay $6 million now and $4 million in one year. Two years from now the project is expected to pay back $5 million, and three years from now it is expected to pay back another $10 million.

Io= -6,000,000

1= 4,000,000

2= 5,000,000

3= 10,000,000

i=0.25

We need to use the following formula:

NPV= -Io + ∑[Cf/(1+i)^n]

Cf= cash flow

NPV= 5,520,000

The firm should do the project when the net present value is positive.

answer; ///after donning a gown, mask and eyewear;