Question

In: Finance

The company uses funded reserve ($5,000) to cover the fire loss. Suppose the annual rate of...

The company uses funded reserve ($5,000) to cover the fire loss. Suppose the annual rate of return of the funded reserve is 10%, the NPV of this project is $______________.

Initial investment:$100,000

Life of project:5 years

Expected annual loss from fire:$4,000

Annual cash revenue $30,000 Tax rate 30%

Discount factor 4

Expert Solution

Sol:

Initial investment = $100,000

Life of project = 5 years

Annual cash revenue = $30,000

Tax rate = 30%

Discount factor = 4%

Rate of return of the funded reserve =10%

Reserve fund = $5,000

Annual cash revenue	30000
Reserve fund	5000
Rate of return on reserve fund	10%
Tax rate	30%
Discount factor	4%

Year	Return on total capital (CF)	Present value (PV)
0	-$100,000	-$100,000
1	$21,350	$20,528.85
2	$21,350	$19,739.28
3	$21,350	$18,980.07
4	$21,350	$18,250.07
5	$21,350	$17,548.14
	NPV	-$4,953.59

Therefore NPV of this project is -$4953.59 USD

jeff jeffy answered 2 years ago

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