Question

1.) Organic Farms is considering an investment in a new irrigation system that will cost $65,000 and last for four years. The firm's cost of capital, appropriate for this project, is 8.00% per year. The incremental free cash flows for the irrigation project are as follows:

Year	Free Cash Flows
0	-$65,000
1	20,300
2	20,300
3	20,300
4	20,300

Compute the NPV for the project.

Round your answer to the nearest penny. For example, $2,371.243 should be entered as 2371.24

2.) Please identify the correct formula used to answer the previous question.  

Answer 1

Ans : NPV = Present value of cash inflows - present value of cash outflows

Present value of cash outflows = $ 65,000

Present value of cash inflows = $ 20,300 * Present value annutiy factor ( 8% , 4 years)

= $ 20,300 * [ (1/(1.08) + 1/(1.08)² + 1/(1.08)³ +1/(1.08)⁴ ]

= $ 20,300 * [ 0.9259 + 0.8573 + 0.7938 + 0.7350 ]

= $ 20,300 * 3.3121

= $ 67,236.17485

= $ 67,236.17

NPV = Present vaule of cash inflows - present value of cash outflows

= $ 67,236.17 - $ 65,000

= 2,236.17