Question

Star City is considering an investment in the community center that is expected to return the following cash flows: Use Exhibit A.8.

Year Net Cash Flow
1 $ 35,000
2 65,000
3 95,000
4 95,000
5 115,000

This schedule includes all cash inflows from the project, which will also require an immediate $215,000 cash outlay. The city is tax-exempt; therefore, taxes need not be considered.

Required:

a. What is the net present value of the project if the appropriate discount rate is 25 percent? (Round PV factor to 3 decimal places. Negative amount should be indicated by a minus sign.)

b. What is the net present value of the project if the appropriate discount rate is 15 percent? (Round PV factor to 3 decimal places. Negative amount should be indicated by a minus sign.)

Answer 1

Solution a:

Computation of NPV
Particulars	Period	PV Factor (25%)	Amount	Present Value
Cash outflows:
Initial investment	0	1	$215,000	$215,000
Present Value of Cash outflows (A)				$215,000
Cash Inflows
Year 1	1	0.800000	$35,000.00	$28,000
Year 2	2	0.640000	$65,000.00	$41,600
Year 3	3	0.512000	$95,000.00	$48,640
Year 4	4	0.410000	$95,000.00	$38,950
Year 5	5	0.328000	$115,000.00	$37,720
Present Value of Cash Inflows (B)				$194,910
Net Present Value (NPV) (B-A)				-$20,090

Solution b:

Computation of NPV
Particulars	Period	PV Factor (15%)	Amount	Present Value
Cash outflows:
Initial investment	0	1	$215,000	$215,000
Present Value of Cash outflows (A)				$215,000
Cash Inflows
Year 1	1	0.870000	$35,000.00	$30,450
Year 2	2	0.756000	$65,000.00	$49,140
Year 3	3	0.658000	$95,000.00	$62,510
Year 4	4	0.572000	$95,000.00	$54,340
Year 5	5	0.497000	$115,000.00	$57,155
Present Value of Cash Inflows (B)				$253,595
Net Present Value (NPV) (B-A)				$38,595