Question

29. What is the NPV of project A? The project would require an initial investment in equipment of 76,000 dollars and would last for either 3 years or 4 years (the date when the project ends will not be known until it happens and that will be when the equipment stops working in either 3 years from today or 4 years from today). Annual operating cash flows of 22,800 dollars per year are expected each year until the project ends in either 3 years or 4 years. In 1 year, the project is expected to have an after-tax terminal value of 47,323 dollars. The cost of capital for this project is 9.94 percent.

Answer 1

Please see the below NPV calculation :

Net present Value Project A	Year 0	year 1	Year 2	Year 3	Year 4
Intial Investment	$ (76,000.00)
Cash Flow		$ 22,800.00	$ 22,800.00	$ 22,800.00	$ 22,800.00
Cost of capital (9.94%)		$ 20,738.58	$ 18,863.55	$ 17,158.04	$ 15,606.73
NPV (If project runs 4 years)	$   72,366.90
NPV (If project runs 3 years)	$   56,760.17

Based on the NPV value this is not a great invesment.

After tax terminal value is not required to identify NPV