Question

rossdale flower has a new greenhouse project with a initial cost of$319,500 that is expected to generate cashflow of $45,900 for 9 years and a cashflow of $61,300 in year 10. if the required return is 8.3 percent, what is the project NPV?

Answer 1

The present value of the cash flows for all the years by discounting the cash flow at 8.3% is calculated as follows.

YEAR	CASH FLOWS (IN$)	DISCOUNTING FACTOR AT 8.3%	PRSENT VALUE OF CASH FLOWS(IN$)
1 TO 9	45,900.00	6.1697	2,83,189.23
10	61,300.00	0.4505	27,615.65
Total present value of cash flow	3,10,804.88
Less : Intial investment	-3,19,500.00
Net present value	-8,695.12

• Calculation of Present value annuity factor
• Present value annuity factor = Total of present value factors from 1 to 9

• PVAF = F.V      +    F.V   +     F.V

              (1+r) ¹          (1+r) ²      (1+r) ⁿ

• Present value factor = 1 /(1+r)ⁿ

• r = rate of interest

  n = number of periods.

  F.V= Future value

  PVAF = Present value annuity factor       

• Here in the solution it is calculated as follows.

1st year =1/(1+0.083)¹ =0.9233

  2nd year =1/(1+0.083)² =0.8526

1. In the same way it is calculated for all remaining years till 9th year and if you add up all these factors the annuity factor will be 6.1697 as shown above and multiply with Cash flows you will get present value .
2. During the 10th year cash flow has changed that is why it is calculated separately. Therefore, 10th year factor will be 0.4505.
3. Annuity factors are calculated when cash flows are same for every period once the cash flows is changed then separately it is calculated.
4. Formula is made by taking future value as $1 i.e if you get $1 as cash flows for every year what will be your factors and then these factors will be multiplied with actual cash flows ocurred.

Decision Making

THE NET PRESENT VALUE IS NEGATIVE BECAUSE THE INITIAL COST INVESTED IS GREATER THAN PRSENT VALUE CASH INFLOWS FROM THE PROJECT.

CONCLUSION : THE PROJECT SHOULD NOT BE UNDERTAKEN.

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