Question

2. Rowan Roadworks is considering the purchase of a new $124,500 road grader. Rowan expects the cash inflows to be $18,500 for the first three years, $15,000 for the following four years and $13,500 for three years after that. Rowan plans to sell the used grader at the end of the tenth year for $29,500. What is the NPV if the cost of capital is 7.25%?
A. more than $4,500
B. between $4,500 and $3,000
C. between $3,000 and $1,500
D . between $1,500 and – $2,500
E. between – $2,500 and – $6,000

3. Your business is considering the purchase of a new $9,850 machine. If you expect the cash inflows to be $2,500 for the first three years, – $1,550 in the fourth year (due to maintenance costs) and $2,200 for the following three years after that. You expect to sell the used machine at the end of the seventh year for $750. What is the NPV if the cost of capital is 8.5%?
A. more than $700
B. between $700 and $250
C. between $250 and – $200
D. between – $200 and – $550
E. between – $550 and – $900

Answer 1

2

Project
Discount rate	0.0725
Year	0	1	2	3	4	5	6	7	8	9	10
Cash flow stream	-124500	18500	18500	18500	15000	15000	15000	15000	13500	13500	43000
Discounting factor	1	1.0725	1.150256	1.23365	1.3230894	1.419013	1.521892	1.632229	1.750566	1.877482	2.013599
Discounted cash flows project	-124500	17249.42	16083.37	14996.15	11337.102	10570.72	9856.153	9189.887	7711.793	7190.483	21354.8
NPV = Sum of discounted cash flows
NPV Project =	1039.88
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

3

Project
Discount rate	0.0725
Year	0	1	2	3	4	5	6	7
Cash flow stream	-9850	2500	2500	2500	-1550	2200	2200	2200
Discounting factor	1	1.0725	1.150256	1.23365	1.3230894	1.419013	1.521892	1.632229
Discounted cash flows project	-9850	2331.002	2173.429	2026.507	-1171.501	1550.373	1445.569	1347.85
NPV = Sum of discounted cash flows
NPV Project =	-146.77
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor