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35. Deep Hollow Welding is considering a project that provides an annual cash inflow of $150,000...

35.

Deep Hollow Welding is considering a project that provides an annual cash inflow of $150,000 for the first six years, $200,000 per year for Year 7 through Year 9, and $100,000 for Year 10. The project requires an initial investment of $1 million. If the firm’s required return for this project is 10 percent, what is the net present value?

$126,813

$110,320

$56,887

$96,774

$27,404

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Answer #1

Present value of first set of cash inflows = Annuity * [1 - 1 / (1 + r)n] / r

Present value of first set of cash inflows = 150,000 * [1 - 1 / (1 + 0.1)6] / 0.1

Present value of first set of cash inflows = 150,000 * 4.35526

Present value of first set of cash inflows = 653,289.1049

Present value of second set of cash inflows = {200,000 * [1 - 1 / (1 + 0.1)3] / 0.1} / (1 + 0.1)6

Present value of second set of cash inflows = {200,000 * 2.486852} / 1.77156

Present value of second set of cash inflows = 280,752.7818

Present value of last cash inflow = 100,000 / (1 + 0.1)10

Present value of last cash inflow = 100,000 / 2.59374

Present value of last cash inflow = 38,554.3259

NPV = present value of cash inflows - present value of cash outflows

NPV = 653,289.1049 + 280,752.7818 + 38,554.3259 - 1,000,000

NPV = -27,404

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