Question

Big Al’s Gas Company owns several gas stations, and they are looking to add another. One station they are evaluating is located at a site that has been leased. The lease currently has 30 years before expiration (so the last cash flow will occur at t = 30). The gas station is expected to generate a net cash flow of $65,000 for 30 years starting at the end of the first year. If Big Al needs to invest $500,000 in the project with a cost of capital of 8%, what is the NPV of this gas station?

Answer 1

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

• Press the CF button.
• CF0= -$500,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 8%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 8% cost of capital is $231,755.91.