a large computer chain is considering the purchase of a very popular software company for $1,700,000. the chain estimates that the software company will generate cash flows of $180,000 per year in perpetuity after taxes. the chain's wacc is 10%. what is the project's npv?

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27-10-2022
Business

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a large computer chain is considering the purchase of a very popular software company for $1,700,000. the chain estimates that the software company will generate cash flows of $180,000 per year in perpetuity after taxes. the chain's wacc is 10%. what is the project's npv?

Answer :

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Based on the cost to purchase the very popular software company, and the cash flows generated per year, the Project's NPV can be found to be $100, 000

How to find the Net Present Value (NPV)?

The Net Present Value is the present value of the cash inflows for a project after the investment or purchase cost for the project has been deducted from that present value.

The present value of the cash flows of the very popular software company is $180, 000 per year in perpetuity. And the Weighted Average Cost of Capital is 10%.

The present value of these cash flows can be found as:

= Cash flows in perpetuity / Weighted Average Cost of Capital

= 180, 000 / 10%

= $1, 800, 000

The Net Present Value for the purchase of the very popular software company by the large computer chain is:

= Present value of cash flows - Cost to purchase the company

= 1, 800, 000 - 1, 700, 000

= $100, 000

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