Question

Dunay Corporation is considering investing $860,000 in a project. The life of the project would be 6 years. The project would require additional working capital of $36,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $182,000. The salvage value of the assets used in the project would be $46,000. The company uses a discount rate of 13%. (Ignore income taxes.)

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

Required:

Compute the net present value of the project. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)

Answer 1

NPV = Present value of cash flow-Initial cash outflow

we will use discount rate to find present value of cash flow

when there is uniform series of cash flow for years, we will use PV annuity

for single cash flow we will use PV factor

year 0 cash flow = $860,000+36,000

$896,000

year	cash flow	PV factor	Present value of cash flow
0	($896,000)	1	($896,000)
1-6	$182,000	3.998	$727,636[$182,000*3.998]
6	$82,000[$36,000+$46,000]	0.480	$39,360[$82,000*0.480]
		NPV	-$129,004[-$896,000+727,636+39,360]

Thus, NPV is -$129,004

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