Question

Boulderado has come up with a new composite snowboard. Development will take Boulderado four years and cost​ $250,000 per​ year, with the first of the four equal investments payable today upon acceptance of the project. Once in production the snowboard is expected to produce annual cash flows of​ $200,000 each year for 10 years. ​ Boulderado's discount rate is​ 10%.

The NPV for​ Boulderado's snowboard project is closest​ to:

A. ​$23,800

B.$46,900

C. ​$51,600

D. ​$228,900

Answer 1

We know that the net present value is the present value of cash inflow less the present value of cash outflow discounted using the given interest rate

Now, the formula for present value of future cash flow is A/(1+r)ⁿ

Where A is the cash flow in the nth period and r is the discount rate and n is the future period

Hence the Net Present value by discounting each net cash flow can be tabulated as below.

Year	Cash inflow(A)	Cash outflow(B)	Net Cash Flow(A+B)	Present Value Factor @ 10%	Present Value( A+B)*C
0	-	2,50,000	-2,50,000	1	-2,50,000.00
1	-	2,50,000	-2,50,000	0.91	-2,27,272.73
2	-	2,50,000	-2,50,000	0.83	-2,06,611.57
3	-	2,50,000	-2,50,000	0.75	-1,87,828.70
4	2,00,000	-	2,00,000	0.68	1,36,602.69
5	2,00,000	-	2,00,000	0.62	1,24,184.26
6	2,00,000	-	2,00,000	0.56	1,12,894.79
7	2,00,000	-	2,00,000	0.51	1,02,631.62
8	2,00,000	-	2,00,000	0.47	93,301.48
9	2,00,000	-	2,00,000	0.42	84,819.52
10	2,00,000	-	2,00,000	0.39	77,108.66
11	2,00,000	-	2,00,000	0.35	70,098.78
12	2,00,000	-	2,00,000	0.32	63,726.16
13	2,00,000	-	2,00,000	0.29	57,932.88
			Net present value	51,587.84

hence we can say that the NPV is nearest to 51,600