Question

Skyline Corp. will invest $190,000 in a project that will not begin to produce returns until the end of the 3rd year. From the end of the 3rd year until the end of the 12th year (10 periods), the annual cash flow will be $44,000.

Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

  a. Calculate the net present value if the cost of capital is 12 percent. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

Net present value

b. Should the project be undertaken? Yes or No?

Please give a step by step solution using a calculator

Answer 1

Initial investment =   190000  
period of cash flows =   10 years  
CAsh inflow =   44000  
cost of capital (r) = 12% or   0.12  

Amount is annually same. So present value of cash inflows formula will be applicable.
Present value of annuity at year 2(1 year before start of cash inflows) = Annual amount * (1-(1/(1+r)^n) / r      
=44000 * (1-(1/(1+0.12)^10))/0.12      
=248609.8133      
This is value at year 2. Value at year 0 = Future value at year 2/(1+i)^n      
=248609.8133   /(1+0.12)^2  
=198190.221      
      
      
NPV = Present value of cash inflow-initial investment      
198190.221 -190000  
=8190.221022      
      
NPV of investment is   $8,190.22  
      
(b) NPV is positive. So project should be undertaken.