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A project has been evaluated on the basis that it will cost $14 million and will have a net present value of $2.3 million.The project has commenced and $3 million of the initial $14million has been invested. A problem has been discovered that will cost an additional $2.5million to rectify. The $2.5 million will be payable immediately. What is the NPV of continuing with this project?
A.-$3 million
B.-$0.2 million
C.$1.8 million
D.$2.8 millionHow is the npv of continuing with this project calculated?
So, before any cashflows, NPV = 2.3
After 3 spent, and before the problem was identified, the NPV of remaining, future cashflows will be 5.3 as 11 still to be spent and inflows unchanged. (Remember that sunk costs are not relevant to NPVs as these depend only on future cash flows.)
If 2.5 extra has to be spent now, this will reduce the NPV to 5.3 – 2.5= 2.8
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