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1 May, 21:23

Coyne Corporation is evaluating a capital investment opportunity. This project would require an initial investment of $ 39 comma 000 to purchase equipment. The equipment will have a residual value at the end of its life of $ 2 comma 000. The useful life of the equipment is 6 years. The new project is expected to generate additional net cash inflows of $ 20 comma 000 per year for each of the six years. Coyne's required rate of return is 10 %. The net present value of this project is closest to:

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  1. 1 May, 21:25
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    NPV = $49,234.16

    Explanation:

    The Net present value (NPV) is the difference between the Present value (PV) of cash inflows and the PV of cash outflows. A positive NPV implies a good investment project and a negative figure implies the opposite.

    NPV of an investment:

    NPV = PV of Cash inflows - PV of cash outflow

    Present value of cash inflows:

    A * 1 - (1+r) ^ (-n) / r

    A - annual cash inflow-20,000 r-rate of return-10%, n-number of years-6

    PV of cash flow = 20,000 * (1.1) ^ (-6) / 0.1 = 87,105.21399

    PV of scrap value

    F * (1+r) ^ (-n)

    F - scrap value

    = 2,000 * 1.1^ (-6) = 1,128.94

    Initial cost = $39,000

    NPV = 87,105.21399 + 1,128.94 - 39,000 = $49,234.16

    NPV = $49,234.16
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