An auto-parts company is deciding whether to sponsor a racing team for a cost of $1 million. the sponsorship would last for three years and is expected to increase cash flows by $580,000 per year. if the discount rate is 7.5%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship

$ 508304.93

Explanation:

Using the formula for calculating the net present value

NPV = Cash flow / ( 1 + i)^n - initial investment

where NPV = net present value which represent the change in the value of the company

i = the discounted rate  and n is the number of years

NPV = 580000 / (1 + 0.075)¹ + 580000 / (1 + 0.075)² + 580000 / (1 + 0.075)³ - 1 000 000 = 539534.88 + 501892.92 + 466877.13 - 1000000 = $ 508304.93 is the change in the value of the company.

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.

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