Question

Citrus Company is considering a project that has estimated annual net cash flows of $21,300 for six years and is estimated to cost $100,000. Citrus’s cost of capital is 8 percent.
   

Determine the net present value of the project. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign. Round your final answer to 2 decimal places.)

   

	Net Present Value

   

Based on NPV, determine whether project is acceptable to Citrus.

	Acceptable
	Unacceptable

Answer 1

• Net present Value = Present Values of Cash inflow – Initial Investment cost.
• Present Values can be calculated using a discounting rate which is 8% in the question.
• Since the annual cash flows are same each year, Present Value Annuity of $1 will have to be used to find the ‘annuity value’ of $1 under 8% for the 6^th period.
• YOU HAVE TO LOOK for Table “Present Value Annuity of $1”. There you find the column with 8% rate. Under that 8% Interest rate column, you will have to go down to the 8^th period respective amount, which will be approximately 4.622880
• Multiply the annual cash flow with this amount.

$ 21,300 x 4.622880 [You multiply with the rounded off value that you find in that table]

= $ 98,467.34

• Net present value = $ 98,467.34 - $ 100,000 = $ (1,532.66) = Negative NPV, enter with minus sign.
• The project should not be accepted because the NPV is negative.
• NOTE: I’ve shown you how to get the answer. Based on my rounded off figure of $1 Annuity, my answer could be a little different. In case of any querry please comment if the you’re having trouble with correct answer.