Reading 32 Capital Budgeting - LOS-d: calculate and interpret net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, and profitability index (PI) of a single capital project

CFA Level I Corporate Finance
#1

Hi,

I am having difficulty with the below “…and $300,000 thereafter indefinitely…” how do I enter in BAII plus calculator to NPV?

Tom and Erdal are planning on forming the Top-Torque Company. The company is to specialize in diesel engine rebuilding for extractive industries. The investment cost is expected to be $1.5 million and have after-tax cash flows of $100,000 in year 1, $250,000 in year 2, and $300,000 thereafter indefinitely. The two owners estimate that this is a risky venture and requires a 17% rate of return. What is the value of Top-Torque, and should the investment be made?
A. $57,240; yes
B. $1,557,240; yes
C. -$57,240; no

Correct answer: A

#2

C03 = 300,000
F03 = 1,000 (just something large enough to replicate a perpetuity)

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#3

thanks millions for your help!

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