Question

Crane Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $1,815,338, have a life of five years, and would produce the cash flows shown in the following table. Year Cash Flow 1 $546,372 2 -255,300 3 963,920 4 694,420 5 656,480 What is the NPV if the discount rate is 17 percent?

Answer 1

Given about Crane Condiments project,

Machine cost C0 = $1815338

Yearly cash flows are as follow:

year 1 CF1 = $546372

year 2 CF2 = $-255300

year 3 CF3 = $963920

year 4 CF4 = $694420

year 5 CF5 = $656480

discount rate d = 17%

NPV of the project is sum of PV of future cash flows - initial cost

=> NPV = CF1/(1+d) + CF2/(1+d)^2 + CF3/(1+d)^3 + CF4/(1+d)^4 + CF5/(1+d)^5 - C0

=> NPV = 546372/1.17 - 255300/1.17^2 + 963920/1.17^3 + 694420/1.17^4 + 656480/1.17^5 - 1815338

=> NPV = -263005.11

So, NPV of the project is $ -263005.11