Answer:
The NPV of the investment is: $34,114
Explanation:
We need to calculate the present value of each year net cash flows during the investment lifetime of 4 years.
Y0 - Present value = -Cost of equipment - Investment in working capital = -145,000 - 63,000 = -$208,000
Y1 - Net cash flows = Sales revenue - Variable cost - Fixed operating cost = 280,000 - 135,000 - 73,000 = $72,000 => Present value of Y1 = 72,000/1.15 = $62,609
Y2 - Net cash flows = Sales revenue - Variable cost - Fixed operating cost -Overhaul of the equipment = 280,000 - 135,000 - 73,000 - 9,500 = $62,500 => Present value of Y2 - 62,500/ 1,15^2 = $47,259
Y3 - Net cash flows = Sales revenue - Variable cost - Fixed operating cost = 280,000 - 135,000 - 73,000 = $72,000 => Present value of Y3 = 72,000/1.15^3 = $47,341
Y4 - Net cash flows = Sales revenue - Variable cost - Fixed operating cost + Salvage recovery + Working capital realized = 280,000 - 135,000 - 73,000 + 13,500 + 63,000 = $148,500 => Present value of Y4 = 148,500/1.15^4 = $84,905
=> Net present value of the investment = -$208,000 + $62,609 + $47,259 + $47,341 + $84,905 = $34,114
