What is the NPV of an equipment investment that costs $150,000 and returns $80,000 in the...

What is the NPV of an equipment investment that costs $150,000 and returns $80,000 in the first year but then declines by 8%/year with the final cash flow coming in year 5? Also assume a discount rate of 9.4% and that the equipment can be sold for $45,000 at the end of the fifth year.
1. $250,000
2. $266,400
3. $116,400
4. $190,900
5. $145,100

Expert Solution

$145,100

Difference of $ 6 in working answer may be due to rounding off difference.

Step-1:Calculation of cash flows for each year

	Year				return	Sale price of equipment	Total Cash flows
	1			=	$ 80,000		$ 80,000
	2	80000	*(1-0.08)	=	$ 73,600		$ 73,600
	3	73600	*(1-0.08)	=	$ 67,712		$ 67,712
	4	67712	*(1-0.08)	=	$ 62,295		$ 62,295
	5	62295.04	*(1-0.08)	=	$ 57,311	$ 45,000	$ 1,02,311

Step-2:Calculation of NPV

	Year	Cash flows		Present value of 1		Present value of cash flows
	a	b		c=1.094^-a		d=b*c
	0	$ -1,50,000		1.0000		$ -1,50,000
	1	$ 80,000		0.9141		$ 73,128
	2	$ 73,600		0.8355		$ 61,493
	3	$ 67,712		0.7637		$ 51,712
	4	$ 62,295		0.6981		$ 43,488
	5	$ 1,02,311		0.6381		$ 65,285

		NPV				$ 1,45,106

jeff jeffy answered 2 years ago

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