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Falcon Crest Aces (FCA), Inc., is considering the purchase of a
small plane to use in its wing-walking demonstrations and aerial
tour business. Various information about the proposed investment
follows:
| Initial investment | $ | 190,000 | |||||
| Useful life | $ | 10 | years | ||||
| Salvage value | 20,000 | ||||||
| Annual net income generated | $ | 4,400 | |||||
| FCA's cost of capital | 6 | % | |||||
Assume straight line depreciation method is used.
3. Help FCA evaluate this project by
calculating each of the following: Net present value (NPV). (Future
Value of $1, Present Value of $1, Future Value Annuity of $1,
Present Value Annuity of $1.) (Use appropriate factor(s)
from the tables provided. Do not round intermediate calculations.
Negative amount should be indicated by a minus sign. Round the
final answer to nearest whole dollar.)
Solution 3:
Annual depreciation = (Cost - Salvage value) / useful life = ($190,000 - $20,000) / 10 = $17,000
Annual cash inflows = Annual net income + Depreciation = $4,400 + $17,000 = $21,400
| Computation of NPV | ||||
| Particulars | Period | Amount | PV factor at 6% | Present Value |
| Cash outflows: | ||||
| Initial investment | 0 | $190,000.00 | 1 | $190,000 |
| Present Value of Cash outflows (A) | $190,000 | |||
| Cash Inflows | ||||
| Annual cash inflows | 1-10 | $21,400.00 | 7.36009 | $157,506 |
| Salvage value | 10 | $20,000.00 | 0.55839 | $11,168 |
| Present Value of Cash Inflows (B) | $168,674 | |||
| Net Present Value (NPV) (B-A) | -$21,326 |
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