Hicks Company is considering an investment opportunity with

Hicks Company is considering an investment opportunity with the following expected net cash inflows: Year 1, $235,000; Year 2, $195,000; Year 3, $125,000. The company uses a discount rate of 6%, and the initial investment is $365,000. Calculate the NPV of the investment. Should the company invest in the project? Why or why not?

Solution

Cash Flows:
Year 0 = -$365,000
Year 1 = $235,000
Year 2 = $195,000
Year 3 = $125,000

Discount Rate = 6%

Net Present Value = -$365,000 + $235,000/1.06 + $195,000/1.06^2 + $125,000/1.06^3
Net Present Value = $135,200

NPV of this project is positive. So, the company should invest in this project.