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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 $570,000 per year. If the discount rate is 6.9%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship

Answer :

Answer:

$498,597.35

Explanation:

For this question we have to determine the net present value which is shown below:

Year Cash flows Discount factor at 6.9%        Present value

0         -$1000,000 1                                        -$1000,000   (A)

1          $570,000 0.935453695                         $533,208.61

2          $570,000 0.8750736156                 $498,791.96

3          $570,000 0.8185908471                $466,596.78

Total present value                                          $1,498,597.35  (B)

Net present value                                            $498,597.35  (A - B)

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