Question

This is a two-part question.

PART 1: A firm is considering an unusual project of the selling of a machine today that will result in an immediate inflow of $540. Without the use of the machine the firm will incur an annuity of expenditures or outflows of $89 per year that begin at the end of year one, and continue for 6 consecutive years. The required rate of return is 7.70%. What is the project's net present value?

ANSWER TO PART 1: $

Place your answer in dollars and cents. If your answer is negative, then indicate this by placing a "minus" sign before the number. Do not use a dollar sign or comma. For example, an answer of negative one thousand one hundred and eleven dollars as -1111. Work your analysis using at least 4 decimal places of accuracy.

NOW GO ON TO THE SECOND PART!

PART 2. Given your NPV, should Scotch accept or reject the project? Type the word "yes" if you believe they should go ahead with the project or the word "no" if you believe they should not go ahead with the project.

ANSWER To PART 2:

Answer 1

1)

Project
Discount rate	7.700%
Year	0	1	2	3	4	5	6
Cash flow stream	540	-89	-89	-89	-89	-89	-89
Discounting factor	1.000	1.077	1.160	1.249	1.345	1.449	1.561
Discounted cash flows project	540.000	-82.637	-76.729	-71.243	-66.150	-61.420	-57.029
NPV = Sum of discounted cash flows
NPV Project =	124.79
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

2)

Accept project as NPV is positive