Question

You work in the finance department at a plastics production firm, and your manager has asked you to make a recommendation about a project. The estimated cost to start the project is $205,000.00, and the estimated cash flow in year 1 is $52,000.00, in year 2 is $57,000.00, in year 3 is $52,000.00, in year 4 is $56,000.00, and in year 5 is $65,000.00. If the relevant discount rate is 8.80%, then should you accept or reject the project? NPV = $ (Give your response to two decimal places.) the project.

Answer 1

Net Present Value (NPV) of the Project

Year	Annual Cash Flow ($)	Present Value factor at 8.80%	Present Value of Cash Flow ($)
1	52,000	0.919118	47,794.12
2	57,000	0.844777	48,152.30
3	52,000	0.776450	40,375.38
4	56,000	0.713649	39,964.32
5	65,000	0.655927	42,635.26
TOTAL			218,921.38

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

= $218,921.38 - $205,000

= $13,921.38

DECISION

YES. We should accept the project, since the Net Present Value of the Project is Positive $13,921.38

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Discount Rate and “n” is the number of years.