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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

Solutions

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 1 year ago
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