Question

Cullumber Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $179,935 and have an estimated useful life of 9 years. It can be sold for $64,800 at the end of that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $25,800. The company’s borrowing rate is 8%. Its cost of capital is 10%. Click here to view the factor table.

Calculate the net present value of this project to the company and determine whether the project is acceptable. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to 0 decimal places, e.g. 125.)

Net present value

$enter the net present value in dollars rounded to 0 decimal places

 

The project select an option                                                          is unacceptableis acceptable.

Answer 1

Net present value = present value of annual net cash flow - initial investment

 

Present value of annual net cash flow = present value of net annual cashflow $25,800 + present value of salvage value $64,800

 

it should be discounted using companies cost of capital 10%.

 

Therefore,

 

Present value of annual net cash flow = ($25800 x 5.75902) + ($64800 x 0.42410)

 

= 148582.716 + 27481.68

 

= 176064.396

 

Where, PVAF(10%, 9) = 5.75902

PVF(10%, 9 years) = 0.42410

 

Therefore,

 

 

NPV = $176064.396 - $179,935

 

Net present value = - $3,871

 

The project is unacceptable as the NPV is negative

 

 

Net present value = - $3,871

 

The project is unacceptable as the NPV is negative