Question

Davis Chili Company is considering an investment of $18,000, which produces the following inflows:

  

Year	Cash Flow
1	$	10,000
2		9,000
3		6,000

Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. Determine the net present value of the project based on a zero percent discount rate.
  

b. Determine the net present value of the project based on a 10 percent discount rate. (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

c. Determine the net present value of the project based on a 19 percent discount rate. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)
  

Answer 1

a.Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$18,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 0%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 0% discount rate is $7,000.

b.Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$18,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 10%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 10% discount rate is $3,036.81.

c.Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$18,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 19%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 19% discount rate is $319.34.

In case of any query, kindly comment on the solution.