Question

​(Related to Checkpoint​ 11.1) ​ (Net present value​ calculation)  Dowling Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of ​$5,500,000 and would generate annual net cash inflows of $1,100,000 per year for 7 years. Calculate the​ project's NPV using a discount rate of 5 percent.

If the discount rate is 5 ​percent, then the​ project's NPV is ​$_______. ​(Round to the nearest​ dollar.)

Answer 1

Given that the discount rate is 5%.
The cash flows are:
Year 0: -5500000
Year 1:1100000
Year 2:1100000
Year 3:1100000
Year 4:1100000
Year 5:1100000
Year 6:1100000
Year 7:1100000

Net present value=-Initial cash outflow + Present value of future cash flows.
Present value is calculated as:
=(Future value)/(1+Discount rate)^(Number of years)
Net present value=-5500000 + (1100000)/(1+5%)^1+ (1100000)/(1+5%)^2+ (1100000)/(1+5%)^3+ (1100000)/(1+5%)^4+ (1100000)/(1+5%)^5+ (1100000)/(1+5%)^6+ (1100000)/(1+5%)^7
=-5500000 + (1100000)/1.05+ (1100000)/1.1025+ (1100000)/1.157625+ (1100000)/1.21550625+ (1100000)/1.276281563+ (1100000)/1.340095641+ (1100000)/1.407100423
=-5500000 + 1047619.048+ 997732.4263+ 950221.3584+ 904972.7223+ 861878.7828+ 820836.9361+ 781749.463
=865010.73690 or 865011 (Rounded to the nearest​ dollar)

Answer: Hence, the NPV is $865011