Question

Calc Inc is considering a proposed strategy. If Calc Inc decides to proceed with the strategy, the corporation will have a $7,300 operational cash flow a year for three years. The cash investment in the beginning of the strategy will be $11,600. The net after-tax salvage value is estimated at $3,500 and will be received during the last year of the project’s life. What is the net present value of the strategy if the required rate of return is 11%?

Answer 1

Given

Operation Cash flow per Year= $ 7300

Initial investment = $ 11600

Computation of Present value of operating cash flows:

Year	Cash flow	Disc @11% [ 1/ ( 1+i)^n	Discounting factor	Discounted Cash flows
1	$7,300	1/( 1.11)^1	0.9009	$6,576.58
2	$7,300	1/( 1.11)^2	0.8116	$5,924.84
3	$7,300	1/( 1.11)^3	0.7312	$5,337.70
		Total	2.4437	$17,839.12

Computation of Terminal Cash flow

Given After Tax salvage value = $ 3500

We know that Present value of Terminal Cash flow = Future value / ( 1+i)^n

Here I = Interest rate and n = No.of Years

Present value of terminal cash flow= $ 3500/ ( 1+0.11)^3

= $ 3500/( 1.11)^3

=  $ 3500/1.367631

= $ 2559.1698

Computation of Net Present value:

S.No	Particulars	Amount
A	Present value of Operating Cashflows	$17,839.12
B	Present value of Terminal Cash flows	$2,559.1698
C	Initial investment	$11,600
	Net Present value ( A+B-C)	$8,798.29

Hence the Net present value of the project is $ 8798.29

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