Question

A Company is considering investing in a new dock that will cost $350,000. The company expects to use the dock for 5 years, after which it will be sold for $90,000. LakeFront anticipates annual net cash inflows of $85,000 resulting from the new dock. Instructions

Calculate the net present value of the dock assuming the company's cost of capital is 10%.

Calculate the net present value of the dock assuming the company's cost of capital is 15%.

Answer 1

The net present value of the dock assuming the company's cost of capital is 10%

Year	Annual cash flows ($)	Present Value Factor (PVF) at 10.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	85,000	0.9090909	77,272.73
2	85,000	0.8264463	70,247.93
3	85,000	0.7513148	63,861.76
4	85,000	0.6830135	58,056.14
5	175,000 [85,000 + 90,000]	0.6209213	108,661.23
TOTAL		378,099.79

Net Present Value (NPV) = Present value of annual cash inflows – Initial investment costs

= $378,099.79 - $350,000

= $28,099.79

The net present value of the dock assuming the company's cost of capital is 15%

Year	Annual cash flows ($)	Present Value Factor (PVF) at 15.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	85,000	0.8695652	73,913.04
2	85,000	0.7561437	64,272.21
3	85,000	0.6575162	55,888.88
4	85,000	0.5717532	48,599.03
5	175,000 [85,000 + 90,000]	0.4971767	87,005.93
TOTAL		329,679.09

Net Present Value (NPV) = Present value of annual cash inflows – Initial investment costs

= $329,679.09 - $350,000

= -$20,320.91 (Negative NPV)

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.