Question

In: Finance

Yr CF Salvage 0 ($69,000) $69,000 1 31,200 48,000 2 35,400 19,000 3 52,750 0                  ...

Yr

CF

Salvage

0

($69,000)

$69,000

1

31,200

48,000

2

35,400

19,000

3

52,750

0

                 

                  Using the 13% cost of capital, what is the project’s NPV if it is operated for the full 3 years? Would the NPV change if the company planned to terminate the project at the end of Year 2? At the end of Year 1? What is the project’s optimal (economic) life?

Solutions

Expert Solution

NPV is calculated using NPV function in Excel.

Net cash flow in terminal year = cash flow + salvage value.

If project is operated for 3 years

NPV is $22,892.

If project is operated for 2 years

NPV is $1,214.

If project is operated for 1 year

NPV is $1,088.

The optimal life is 3 years, because this results in the highest NPV.

jeff jeffy answered 8 months ago
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