Task: XYZ has summarized the expected cash flows from a proposed project below.
t=0 t=1 t=2 t=3 t=4
total investment outlay $400,000
Operating Cash Flow $120,000 $120,000 $120,000 $120000
Total termination cash flow $55,000
Question 1) If the project's WACC is 10.9%, what is the project's NPV?
Question 2) The firm uses it WACC 10.9% to evaluate this project because it believes the project is of average risk. suppose the project actually had lower-than-average risk, and the CFO thinks WACC should be risk adjusted. What effect would this have on the project's NPV?
decrease, no effect, increase
Question 3) XYZ is going to use factory space for this project that it usually rents to other firms. If this project is accepted, xyz will not be able to rent the space to anymore. If the firm usually generates $10,000 per year in after-tax leasing revenue from the factory space, what is the value of the project when you consider this factor? Assume XYZ still considers the project to have average risk and uses WACC of 10.9%.
Question 4) Suppose XYZ management team discloses that nearly $400,000 in research and development costs were incurred before the new project proposal was put together. What effect would this have on the project's NPV?