Question

Walter open his own bowling alley. Annual revenue is $400,000 and annual costs are $200,000.   Initially, the alley requires a $100,000 investment. What is the net present value at the end of the third year of operation, using a discount rate of 10%? There are no taxes.

1. $628,000
2. $447,000
3. $500,000
4. $397,000

Answer 1

	Statement Computing PVCI			In $
	Year	1	2	3
	Annual Revenue	400000.00	400000.00	400000.00
Less	Annual Costs	200000.00	200000.00	200000.00
	Cash Flow	200000.00	200000.00	200000.00
	Discount factor(10%)	0.909	0.826	0.751
	Discounted Cash Flows	181818.18	165289.26	150262.96
		PVCI	497370.40

Statement Computing PVCO	In $
Year	0
Initial Investment	100000.00
Cash Flow	100000.00
Discount factor(10%)	1.000
Discounted Cash Flows	100000.00
PVCO	100000.00

NPV = PVCI-PVCO
397370.39 $( Approximately)
Hence Correct answer is D.$397000