Question

23. You are evaluating a project with initial investment (at year 0) of $240,000 that is expected to produce annual profits of $20,000 for 10 years starting at year 1. After the project ends, there is an abandonment cost of $23,000 at year 11. If your firm’s cost of capital is 11.00%, what is the net present value (NPV) of this project?

(a) $-145,215.36 (b) $-129,512.88 (c) $-63,000.00 (d) $-122,215.36

Answer 1

(b) $-129,512.88

Present value of annual profit		=	$     20,000.00	*	5.889232	=	$   1,17,784.64
Present value of abandonment cost		=	$   -23,000.00	*	0.317283	=	$       -7,297.52
Initial cost							$ -2,40,000.00
NPV							$ -1,29,512.88
Working:
Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
	=	(1-(1+0.11)^-10)/0.11		i	=	11%
	=	5.889232		n	=	10
Present value of 1	=	(1+i)^-n		Where,
	=	(1+0.11)^-11		i	=	11%
	=	0.317283		n	=	11