A project will produce an operating cash flow of $14,600 a year for 8 years. The initial fixed asset investment in the project will be $48,900. The net aftertax salvage value is estimated at $11,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 12 percent

Question

Amethyst

Business

6 July, 04:12

A project will produce an operating cash flow of $14,600 a year for 8 years. The initial fixed asset investment in the project will be $48,900. The net aftertax salvage value is estimated at $11,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 12 percent

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Daniela Abbott · Answer 1

The Net Present Value is: $28070.2561

Explanation:

To calculate the present value you need to use the Net Present Value. The NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

The formula is:

n

NPV = - I0 + ∑ [Rt / (1+i) ^t]

t-1

where:

R t = Net cash inflow-outflows during a single period t

i=Discount rate of return that could be earned in alternative investments

t=Number of timer periods

In this exercise:

I0 = - 48900

Year 1 to 7 = 14600

Year 8 = 14600 + 11000 (salvage value after tax)

i=0,12

NPV = - 48900 + 14600 / (1,12^1) + 14600 / (1,12^2) + 14600 / (1,12^3) + 14600 / (1,12^4) + 14600 / (1,12^5) + 14600 / (1,12^6) + 14600 / (1,12^7) + 25600 / (1,12^8)

NPV = $28070.2561