Bolton Metals Ltd operates a scrap-metal business and is considering whether to invest in a new project to develop the business. At the present time, the business has only ￡230,000 available. The estimated forecasts of cash flows for the project have been calculated (see below) for a 2-year period. The company has a cost of capital of 10% Using the present value table shown below, calculate the net present value for the project Year a. F225.985 b. -￡25,000 C. -￡4,015 d. E5,000

Question

Bolton Metals Ltd operates a scrap-metal business and is considering whether to invest in a new project to develop the business. At the present time, the business has only ￡230,000 available. The estimated forecasts of cash flows for the project have been calculated (see below) for a 2-year period. The company has a cost of capital of 10% Using the present value table shown below, calculate the net present value for the project Year a. F225.985 b. -￡25,000 C. -￡4,015 d. E5,000

Answer 1

The Net Present Value (NPV) of the project is

- option (c) is the right answer.Since the NPV of the project is negative, it would not bring in enough return to justify the initial investment cost. It would be financially smarter for Bolton Metals LTD not to invest in this project.

Answer 2

## Step 1: Initial InvestmentThe first step in calculating the net present value (NPV) of a project is to define the initial investment, which in this case is £230,000.## Step 2: Cash FlowsNext, we consider cash flow in each period of the project.In the first year (Year 1): excluded is \£185,000 and the discount factor is

.### The present value for Year 1 is:

In the second year (Year 2), the cash flow is \£70,000 and the discount factor is

. ### The present value for Year 2 is:

## Step 3: Net Present Value (NPV)The NPV of the business is the sum of discounted cash inflows (year 1 and year 2 cash flow) minus the initial investment for the project.### The NPV calculation is:

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