Question

In order to expand its bottled water business, a local company is considering the acquisition of additional equipment. It plans to buy the equipment. The total cost of the equipment (as one initial payment at the beginning of the project) is $200,500. During the time span of its use, the equipment is expected to produce net cash inflows of $67,000 each year. The equipment is expected to be used for 4 years, then re-sold in the used-equipment market for $25,000. The discount rate (the rate of return assumption for the project) is 12%. What is the net present value (NPV) of this project?

		12%
Period	FV	FV Annuity	PV	PV Annuity
1	1.120	1.000	0.893	0.893
2	1.254	2.120	0.797	1.690
3	1.405	3.374	0.712	2.402
4	1.574	4.779	0.636	3.037
5	1.762	6.353	0.567	3.605
6	1.974	8.115	0.507	4.111
7	2.211	10.089	0.452	4.564
8	2.476	12.300	0.404	4.968
9	2.773	14.776	0.361	5.328
10	3.106	17.549	0.322	5.650

Answer 1

NPV = PV of Cash Inflwos - PV of Cash Outflows

Year	CF	PVF @12%	Disc CF
0	$ -2,00,500.00	1.0000	$ -2,00,500.00
1	$      67,000.00	0.8929	$      59,821.43
2	$      67,000.00	0.7972	$      53,411.99
3	$      67,000.00	0.7118	$      47,689.28
4	$      67,000.00	0.6355	$      42,579.71
4	$      25,000.00	0.5674	$      14,185.67
NPV	$     17,188.08

CFs are given in problem only. Outgoing amount displayed with -ve sign and Incomeing CF displayed with +ve Sign.

PVF(r%, n) = 1/ (1+r)^n

PVF(12%,1) = 1 / ( 1 + 0.12)^1

= 1 / 1.12

= 0.893

Or the same are available in Table provided in question.

Disc CF = CF * PVF (r%,n)

Hope the above explaination is sufficient.