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 .

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 6th period.

• • HOW TO USE THE FACTOR TABLE??
    Step 1: YOU HAVE TO LOOK for Table “Present Value Annuity of $1”.
    Step 2: There you find the column with 8% rate.
    Step 3: Under that 8% Interest rate column, you will have to go down to the 8th period respective amount, which will be approximately 4.622880
    
• Multiply the annual cash flow with the amount as per your annuity table under Step 3.

$ 21,300 x 4.622880 [You multiply with the rounded off value that you find in that table] or “21300 x ‘rounded off amount as per your table’”

= $ 98,467.34

• ANSWER: 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.