Question

A factory costs $860,000. You reckon that it will produce an inflow after operating costs of $176,000 a year for 10 years.

a. If the opportunity cost of capital is 12%, what is the net present value of the factory? Answer: $134,439.25

b. What will the factory be worth at the end of nine years?

No idea

Answer 1

a.
Net present value of factory is calculated as present value of cash inflow less present value of cash outflow
Calculation of net present value of factory.
Year	Cash flow	Discount @ 12%	Present value
0	-$860,000.00	1.00000	-$860,000.00
1	$176,000.00	0.89286	$157,142.86
2	$176,000.00	0.79719	$140,306.12
3	$176,000.00	0.71178	$125,273.32
4	$176,000.00	0.63552	$111,851.18
5	$176,000.00	0.56743	$99,867.13
6	$176,000.00	0.50663	$89,167.08
7	$176,000.00	0.45235	$79,613.46
8	$176,000.00	0.40388	$71,083.45
9	$176,000.00	0.36061	$63,467.36
10	$176,000.00	0.32197	$56,667.29
			$134,439.25
Thus, net present value of factory is $134,439.25.
b.
At end of nine years, the remaining cash inflow would be $170,000 and so the worth of factory at end of nine years would be present value of $170,000 at end of ninth year.
Calculation of present value of $170,000
Worth of factory	170000*(1/(1.12^1))
Worth of factory	$151,785.71
Thus, the factory would be worth of $151,785.71 at end of nine years.