Question

Overton Corporation has gathered the following data on a proposed investment project:

Investment required in equipment	$	590,000
Annual cash inflows	$	74,000
Salvage value of equipment	$	0
Life of the investment		16	years
Required rate of return		7	%

The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment.

Click here to view Exhibit 8B-2 to determine the appropriate discount factor(s) using tables.

**(Ignore income taxes in this problem.)

The net present value of this investment is:

$590,000

$109,078

$70,750

$74,000

Answer 1

Annual Return of Cashflow $ 74000 & will get return on investment for 16 years uniformly except for initial investment now we need to find out present annuity value of future cash flows that are going to occour from 1st year end so need to discount future cash flows at required rate of return expected from initial investment. so need to find Present value=PMT*((1-(1/(1+r)ⁿ))/r) so here

PMT = Annual Cash Flow

r= required rate of return

n= no of period for which benefits will be availed

so here $74000*((1-(1/1+.07)¹⁶))/0.07) = $74000*9.447 = $699078 present value

so net present value = present value of future cash flows - initial investment

=$699078 - $590000 = $ 109078