Question

Wildhorse 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. The firm uses an 18 percent discount rate for projects like this. Should management go ahead with the project?

Year		Cash Flow
0		-$3,485,400
1		871,710
2		896,700
3		1,104,400
4		1,340,360
5		1,450,600

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 ?

$enter The NPV in dollars rounded to 0 decimal places

"what is the NPV?"

Should management go ahead with the project?

The firm should select an option                                                          reject accept the project.

Answer 1

1. Calculation of NPV (Net Present Value)

Answer: NPV =$6,865,719

NPV = Present Value of future cash inflows – Initial Investment

Calculation of Present value of cash inflows for project

Year	Cash Flow	Present Value Factor @ 18% (Required rate of return)	Present Value of cash flow
(I)	(II)	(III)	(II) * (III)
1	$   871,710	0.847458	$      738,737.61
2	$   896,700	0.718184	$      643,995.59
3	$1,104,400	0.608631	$      672,172.08
4	$1,340,360	0.515789	$      691,342.94
5	$1,450,600	0.437109	$      634,070.32
Present Value of the Cash flows inflows			$ 3,380,318.54

Initial Investment =$3,485,400/- (provided in the question)

NPV = Present Value of future cash inflows – Initial Investment

NPV = $3,380,318.54 – $3,485,400.

                   =$6,865,718.54

                   =$6,865,719

Calculation of Discounting Factor (Present Value Factor)

Discount Factor = 1/ (1+R) ^N

R = Discount Rate (i.e. = 18%)

N = No of years

E.g. for year 2 Discount Factor = 1/ (1.18)²

                                                                ⁼ 1/ (1.18) (1.18)

                                                =0.718184

2. What is NPV

3. Should management go ahead with the project?

Accept the project, since NPV is positive (i.e. NPV of$6,865,719)