Question

Crescent Industries management is planning to replace some existing machinery in its plant. The cost of...

Crescent Industries management is planning to replace some existing machinery in its plant. The cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses an 18 percent discount rate for project.

Year Cash Flow
0 -$3,524,500
1 $938,910
2 $969,800
3 $1,149,000
4 $1,263,360
5 $1,409,200


What is the NPV of this project? (Enter negative amounts using negative sign e.g. -45.25. Do not round discount factors. Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25.)

The NPV is $



Should management go ahead with the project?

The firm should

acceptreject

the project.
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Homework Answers

Answer #1

Calculation of NPV of the project:

NPV = (sum of discounted cashinflows - Cashouflows)

Calculation of sum of discounted cashinflows:

Year. Cashflows. PV@18%. P.V of cahflows

1. $938,910. 0.8475 $795,726.2250

2. $969,800. 0.7182. $696,510.3600

3. $1,149,000. 0.6086. $699,281.400

4. $1,263,360. 0.5158. $651,641.088

5. $1,409,200. 0.4371. $615,961.320

. Total. $3,459,120.393

Given cashoutflows = -$3,524,500

NPV =$3,459,120.393 - $ 3,524,500

NPV = -$65,379.61

Since the NPV is negative so it is advisable to not to accept the project.

The management should not accept the project.

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