Question

Davis Chili Company is considering an investment of $37,000, which produces the following inflows:

Year

Cash Flow

1

$

17,000

2

16,000

3

13,000

Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

  

a.	Determine the net present value of the project based on a zero percent discount rate.

  

Net present value

$

  

b.	Determine the net present value of the project based on a 10 percent discount rate. (Do not round intermediate calculations and round your answer to 2 decimal places.)

  

Net present value

$

  

c.	Determine the net present value of the project based on a 16 percent discount rate. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

  

Net present value

$

Answer 1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

a.Present value of inflows=17000+16000+13000

=$46000

NPV=Present value of inflows-Present value of outflows

=$46000-$37000

=$9000.

b.Present value of inflows=17000/1.1+16000/1.1^2+13000/1.1^3

=$38444.78

NPV=Present value of inflows-Present value of outflows

=$38444.78-$37000

=$1444.78(Approx)

a.Present value of inflows=17000/1.16+16000/1.16^2+13000/1.16^3

=$34874.33

NPV=Present value of inflows-Present value of outflows

=$34874.33-$37000

=($2125.67)(Approx)(Negative).