Question

Crescent Industries management is planning to replace some existing machinery in its plant. The cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses an 18 percent discount rate for projects like this. Year Cash Flow 0 -$3,379,600 1 $788,310 2 $898,600 3 $1,137,500 4 $1,212,360 5 $1,602,800 What is the NPV of this project? (Enter negative amounts using negative sign e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525.) The NPV is $ Should management go ahead with the project? The firm should the project.

Answer 1

where CF = Cash flows and t = number of years

Discount Rate = 18 %

Initial Investment = $ 3,379,600

NPV = $ 788,310 / ( 1 + 0.18)¹ + $ 898,600 / ( 1 + 0.18)² + $ 1,137,500 / ( 1 + 0.18)³ + $ 1,212,360 / ( 1 + 0.18)⁴

+ $ 1,602,800 / ( 1 + 0.18)⁵ - $ 3,379,600

= $ 788,310 / 1.18 + $ 898,600 / 1.3924 + $ 1,137,500 / 1.643032 + $ 1,212,360 / 1.938778

+ $ 1,602,800 / 2.287758 - $ 3,379,600

= $ 668,059.32 + $ 645,360.53 + $ 692,317.62 + $ 625,321.80 + $ 700,598.65 - $ 3,379,600

= $ 3,331,657.92 - $ 3,379,600

= - $ 47,942.08

NPV of the project is - $ 47,942.08

The firm should reject the project and not go ahead with it as it will sustain loss to the firm.