Question

Premium Soccer Ball Company is considering a project with the following relevant cash flows: Initial Outlay = $750,000 Incremental Cash Flows from Operations Year 1-4 = $250,000 per year Terminal Cash Flow at the End of Year 4 = $40,000 Compute the net present value of this project if the firm's cost of capital is 12%

Answer 1

Present value factor

= 1 / ( 1 + Rate of Interest ) ^ Number of period

So, PV Factor for year 2 will be

= 1 / [( 1 + 0.12 ) ^ 2]

= 1 / 1.2544

= 0.797194

The following table shows the calculations

Calculations	Years	0	1	2	3	4
A	Initial Cash Outflow	(750,000)	-	-	-	-
B	Annual Cash Inflow	-	250,000	250,000	250,000	250,000
C	Terminal Cash Inflow	-	-	-	-	40,000
D = A+B+C	Net Cash Flow	(750,000)	250,000	250,000	250,000	290,000
E	PV Factor	1	0.892857	0.797194	0.711780	0.635518
F = D x E	Present Value	(750,000.00)	223,214.29	199,298.47	177,945.06	184,300.24
G = Sum F	Net Present Value	34,758.06

So, as per above calculations, the net present value is $ 34,758.06