Question

Hamilton Control Systems will invest $86,000 in a temporary project that will generate the following cash inflows:

Year	Cash Flow
1			$23,000
2			35,000
3			60,000

The firm will also be required to spend $11,000 to close the project at the end of the three years.

a. Compute the net present value if the cost of capital is 8 percent. (Do not round intermediate calculations. Round the final answer to the nearest whole dollar. Negative answer should be indicated by a minus sign. Omit $ sign in your response.)

NPV           $

b. Should the investment be undertaken?

• No

• Yes

Answer 1

(a)-Net Present Value (NPV) of the Project

Year	Annual cash flows ($)	Present Value Factor (PVF) at 8.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	23,000	0.925926	21,296.30
2	35,000	0.857339	30,006.86
3	49,000 [60,000 – 11,000]	0.793832	38,897.78
TOTAL			90,200.93

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $90,200.93 - $86,000

= $4,200.93

“Hence, the Net Present Value (NPV) of the Project will be $4,200.93”

(b)-DECISION

“YES”, The investment should be undertaken, since the NPV for the Project is Positive $4,200.93.

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.