Question

Snow Inc. has just completed development of a new cell phone. The new product is expected to produce annual revenues of $1,400,000. Producing the cell phone requires an investment in new equipment, costing $1,500,000. The cell phone has a projected life cycle of 5 years. After 5 years, the equipment can be sold for $180,000. Working capital is also expected to decrease by $200,000, which Snow will recover by the end of the new product’s life cycle. Annual cash operating expenses are estimated at $820,000. The required rate of return is 8%.

I got 874,392 for the NPV, but the website for my homework says it's incorrect.

	Required:
1.	Prepare a schedule of the projected annual cash flows.
2.	Calculate the NPV using only discount factors from the Present Value of a Single Amount table shown in Present Value Tables.
3.	Calculate the NPV using discount factors from both of the tables shown in Present Value Tables.

Answer 1

Part 1

Year	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Annual revenues		$        1,400,000	$          1,400,000	$        1,400,000	$        1,400,000	$        1,400,000
Annual cash operating expenses		$         (820,000)	$           (820,000)	$         (820,000)	$         (820,000)	$         (820,000)
Investment in new equipment	$       (1,500,000)
Salvage value						$            180,000
Working capital	$           (200,000)					$            200,000
Cash inflow (outflow)	$       (1,700,000)	$            580,000	$             580,000	$            580,000	$            580,000	$            960,000

Part 2

Year	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Cash inflow (outflow)	$       (1,700,000)	$            580,000	$             580,000	$            580,000	$            580,000	$            960,000
Multiply: PV factor @8% (Rounded to 5 Decimal palces)	1.00000	0.92593	0.85734	0.79383	0.73503	0.68058
Present value	$       (1,700,000)	$            537,039	$             497,257	$            460,421	$            426,317	$            653,357
Net present value (Total of present value)	$             874,392

Part 3

Year	Amount	PV factor @8%	Year 2
Total investments	$       (1,700,000)	1.00000	$       (1,700,000)
Net annual cash flow	$             580,000	3.99271	$          2,315,772
Salvage value and working capital (180000+200000)	$             380,000	0.68058	$             258,620
Net present value (Total of present value)			$             874,392