Question

Davis Chili Company is considering an investment of $65,000, which produces the following inflows:

Year | Cash Flow | ||

1 | $ | 29,000 | |

2 | 28,000 | ||

3 | 25,000 | ||

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.

**b.**
Determine the net present value of the project based on a 11
percent discount rate. **(Do not round intermediate
calculations and round your answer to 2 decimal
places.)**

**c.**
Determine the net present value of the project based on a 20
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.)**

Answer #1

a)

Net present value = Present value of cash inflows - presnet value of cash outflows

Net present value = -65,000 + 29,000 / (1 + 0)^1 + 28,000 / (1 + 0)^2 + 25,000 / (1 + 0)^3

Net present value = -65,000 + 29,000 + 28,000 + 25,000

**Net present value = $17,000.00**

b)

Net present value = Present value of cash inflows - presnet value of cash outflows

Net present value = -65,000 + 29,000 / (1 + 0.11)^1 + 28,000 / (1 + 0.11)^2 + 25,000 / (1 + 0.11)^3

Net present value = -65,000 + 26,126.1261 + 22,725.4281 + 18,279.7845

**Net present value = 2,131.34**

c)

Net present value = Present value of cash inflows - presnet value of cash outflows

Net present value = -65,000 + 29,000 / (1 + 0.2)^1 + 28,000 / (1 + 0.2)^2 + 25,000 / (1 + 0.2)^3

Net present value = -65,000 + 24,166.6667 + 19,444.444 + 14,467.5926

**Net present value = -6,921.30**

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