Question

Bill Anders retires in 5 years. He would have to purchase equipment costing $500,000 to equip...

Bill Anders retires in 5 years. He would have to purchase equipment costing $500,000 to equip the outlet and invest an additional $150,000 for inventories and other working capital needs. Other outlets in the fast-food chain have an annual net cash inflow of about $160,000. Mr. Anders would close out the outlets in 5 years. He estimates that the equipment could be sold at that time for about 10% of its original cost and the working capital would be released for use elsewhere. Mr Anders required rate of return is 16%. What is the investment's net present value? Is this an acceptable investment?​ Please help show step by step and explanation on how to solve this problem.

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Answer #1

Answer:-The investment’s present value is -$30960, hence it is not a acceptable investment due to negative net present value.

Explanation:-

Windhoek Mines Ltd.
Net Present Value
Particulars Cash Flows Present Value Factor @16% Present value
(a) (b) (c=a*b)
Net cash flow per year (For 5 years) 160000 3.274 523840
New Equipment (1st Year) -500000 1 -500000
Working Capital -150000 1 -150000
Salvage value (5th year) $500000*10%=$50000 0.476 23800
ADD:- Working capital 150000 0.476 71400
Net Present Value -30960
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