Question

Your Company is considering a project that would require an initial investment of $720,000 and would...

Your Company is considering a project that would require an initial investment of $720,000 and would have a useful life of 8 years. The annual cash receipts would be $178,000 and the annual cash expenses would be $49,000. The salvage value of the assets used in the project would be $45,000. The company uses a discount rate of 10%. Compute the net present value of the project.

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Answer #1

NPV of the project is: - $10,804.95

Workings

Initial Investment = $720,000

Useful Life = 8 years

Annual cash receipts = $178,000

Annual cash expenses = $49,000

Annual profit = (178000-49000) = $129,000

PV Annuity Factor (10%, 8 years) = 5.3349

PV of annual profits = 129000*5.3349 = $688,202.10

Salvage value = $45,000

PV Factor (10%, 8 years) = 0.46651

PV of salvage value = 45000*0.46651 = $20,992.95

PV of Inflows = 688202.10+20992.95 = $709,195.05

NPV = PV of Inflows - PV of Outflows = $709,195.05 - $720,000 = - $10,804.95

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