Question

One of the major music networks plans to add satellite technology to allow its expansion into new markets. The network expects the monthly revenue to increase by $380,000 from new cable subscription fees. The satellite will require an initial cost of $2 million with monthly operating and maintenance costs of $340,000. It will have a $122,000 salvage value after 6 years. Calculate the net present worth of this investment at an interest rate of 6% per year, compounded monthly.

and do you think that the network should make this investment? Explain.

Answer 1

The information provided is as below:

Initial Cost	$ 2000000
Monthly O & M cost	$ 340000
Monthly Revenue	$380000
Salvage value	$ 122000
life	72 months or 6 Years
Interest rate	6% per annum compounded monthly

The net present worth (NPW) is given by:

NPW = Sum of PV of Net Cash Inflow for each month up to 6 years

Net Cash Inflow = Cash Inflow - Cash Outflow

PV of Net Cash Inflow = Net Cash Inflow/(1+(6%/12))^n

Where,

n = nth month

Thus, the NPW of the given investment is:

Month	Initial Cost (Cash Outflow)	O & M Cost (Cash Outflow)	Revenue (Cash Inflow)	Salvage Value (Cash Inflow)	Net Cash Inflow (Cash Inflow - Cash Outflow)	PV of Net Cash Inflow
0	2000000				-2000000	-2000000
1		340000	380000		40000	39801
2		340000	380000		40000	39602.98
3		340000	380000		40000	39405.95
4		340000	380000		40000	39209.9
5		340000	380000		40000	39014.83
6		340000	380000		40000	38820.72
7		340000	380000		40000	38627.59
8		340000	380000		40000	38435.41
9		340000	380000		40000	38244.19
10		340000	380000		40000	38053.92
11		340000	380000		40000	37864.59
12		340000	380000		40000	37676.21
13		340000	380000		40000	37488.77
14		340000	380000		40000	37302.26
15		340000	380000		40000	37116.68
16		340000	380000		40000	36932.01
17		340000	380000		40000	36748.27
18		340000	380000		40000	36565.45
19		340000	380000		40000	36383.53
20		340000	380000		40000	36202.52
21		340000	380000		40000	36022.4
22		340000	380000		40000	35843.19
23		340000	380000		40000	35664.86
24		340000	380000		40000	35487.43
25		340000	380000		40000	35310.87
26		340000	380000		40000	35135.2
27		340000	380000		40000	34960.39
28		340000	380000		40000	34786.46
29		340000	380000		40000	34613.4
30		340000	380000		40000	34441.19
31		340000	380000		40000	34269.84
32		340000	380000		40000	34099.34
33		340000	380000		40000	33929.69
34		340000	380000		40000	33760.89
35		340000	380000		40000	33592.93
36		340000	380000		40000	33425.8
37		340000	380000		40000	33259.5
38		340000	380000		40000	33094.03
39		340000	380000		40000	32929.38
40		340000	380000		40000	32765.55
41		340000	380000		40000	32602.54
42		340000	380000		40000	32440.34
43		340000	380000		40000	32278.95
44		340000	380000		40000	32118.35
45		340000	380000		40000	31958.56
46		340000	380000		40000	31799.56
47		340000	380000		40000	31641.36
48		340000	380000		40000	31483.94
49		340000	380000		40000	31327.3
50		340000	380000		40000	31171.44
51		340000	380000		40000	31016.36
52		340000	380000		40000	30862.05
53		340000	380000		40000	30708.51
54		340000	380000		40000	30555.73
55		340000	380000		40000	30403.71
56		340000	380000		40000	30252.45
57		340000	380000		40000	30101.94
58		340000	380000		40000	29952.18
59		340000	380000		40000	29803.16
60		340000	380000		40000	29654.89
61		340000	380000		40000	29507.35
62		340000	380000		40000	29360.55
63		340000	380000		40000	29214.48
64		340000	380000		40000	29069.13
65		340000	380000		40000	28924.51
66		340000	380000		40000	28780.6
67		340000	380000		40000	28637.42
68		340000	380000		40000	28494.94
69		340000	380000		40000	28353.18
70		340000	380000		40000	28212.12
71		340000	380000		40000	28071.76
72		340000	380000	122000	162000	113125

Thus, NPW = Sum of PV of Net Cash Inflow for each month up to 6 years is $498773.4539

Since, the net present worth is positive, the music network should make this investment.