Question

Net present value: Crescent Industries 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.

Year	Cash Flow
0	-$3,493,710
1	$816,490
2	$930,375
3	$1,216,906
4	$1,341,053
5	$1,392,665

If the company uses an 18 percent discount rate for project like this, the NPV is $____, and the company should reject or accept the project?

Answer 1

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$3,493,710. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 18%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 18% discount rate is -$92,494.9974-$92,495.

The company should reject the project since it generates a negative net present value.

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