Question

Big Al’s Gas Company owns several gas stations, and they are looking to add another. One station they are evaluating is located at a site that has been leased. The lease currently has 30 years before expiration (so the last cash flow will occur at t = 30). The gas station is expected to generate a net cash flow of $65,000 for 30 years starting at the end of the first year. If Big Al needs to invest $500,000 in the project with a cost of capital of 13%, what is the NPV of this gas station?

		a. -$12,783
		b. $65,097
		c. $112,749
		d. $167,788
		e. $231,756

Answer 1

The NPV is computed as shown below:

= Initial investment + Present value of future cash flows

Present value is computed as follows:

= Future value / (1 + r)ⁿ

So, the NPV is computed as follows:

= - $ 500,000 + $ 65,000 / 1.13¹ + $ 65,000 / 1.13² + $ 65,000 / 1.13³ + $ 65,000 / 1.13⁴ + $ 65,000 / 1.13⁵ + $ 65,000 / 1.13⁶ + $ 65,000 / 1.13⁷ + $ 65,000 / 1.13⁸ + $ 65,000 / 1.13⁹ + $ 65,000 / 1.13¹⁰ + $ 65,000 / 1.13¹¹ + $ 65,000 / 1.13¹² + $ 65,000 / 1.13¹³ + $ 65,000 / 1.13¹⁴ + $ 65,000 / 1.13¹⁵ + $ 65,000 / 1.13¹⁶ + $ 65,000 / 1.13¹⁷ + $ 65,000 / 1.13¹⁸ + $ 65,000 / 1.13¹⁹ + $ 65,000 / 1.13²⁰ + $ 65,000 / 1.13²¹ + $ 65,000 / 1.13²² + $ 65,000 / 1.13²³ + $ 65,000 / 1.13²⁴ + $ 65,000 / 1.13²⁵ + $ 65,000 / 1.13²⁶ + $ 65,000 / 1.13²⁷ + $ 65,000 / 1.13²⁸ + $ 65,000 / 1.13²⁹ + $ 65,000 / 1.13³⁰

= - $ 12,783 Approximately

So, the correct answer is option a.

Feel free to ask in case of any query relating to this question