4 . Net present value method Ewing Corporation is evaluating a proposed capital budgeting project that will require an initial investment of $136,000. The project is expected to generate the following net cash flows: Year Cash Flow 1 $40,000 2 $50,900 3 $46,200 4 $43,900 Assume the desired rate of return on a project of this type is 9%. The net present value of this project is Suppose Ewing Corporation has enough capital to fund the project, and the project is not competing for funding with other projects. Should Ewing Corporation accept or reject this project? Reject the project Accept the project

$10,313.50

Accept the project

Explanation:

The net present value is the present value of after tax cash flows from an investment less the amount invested.

The NPV can be found using a financial calculator:

Cash flow for year 0 =  $136,000

Cash Flow for year 1 = $40,000

Cash Flow for year 2 = $50,900

Cash flow for year 3 = $46,200

Cash flow for year 4 = $43,900

I = 9%

NPV = $10,313.50

The project should be accepted because the NPV is postive. It means that the discounted after tax cash flows is greater than the amount investment. This means the project will be profitable.

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