Question help mantua motors is evaluating a capital investment opportunity. this project would require an initial investment ofâ
$38,000 to purchase equipment. the equipment will have a residual value at the end of its life ofâ $3,000. the useful life of the equipment is 5 years. the new project is expected to generate additional net cash inflows ofâ $12,000 per year for each of the five years. mantuaâ motors' required rate of return isâ 14%. the net present value of this project is closest to
1 answer:
Given:
<span>initial investment of $38,000
residual value at the end of its life of $3,000.
useful life of the equipment is 5 years. a
additional net cash inflows of $12,000 per year for each of the five years.
mantua motors' required rate of return is 14%.
</span>
<span>initial investment of $38,000
residual value at the end of its life of $3,000.
useful life of the equipment is 5 years. a
additional net cash inflows of $12,000 per year for each of the five years.
mantua motors' required rate of return is 14%.
</span>
NPV = 12,000 * [(1-(1.14)^-5) / 0.14] – 38,000
NPV = 12,000 * [(1 – 0.519)/0.14] – 38,000
NPV = 12,000 * (0.481/0.14) – 38,000
NPV = 12,000 * 3.436 – 38,000
NPV = 41,232 – 38,000
NPV = 3,232
We need to consider the residual value of 3,000 that the company will have at the end of 5 years. It serves as an additional cash flow, thus, we need to add its PV to the NPV.
Present Value factor of the 3,000 is:
PV Factor = 1 / (1+r)^n
PV Factor = 1 / (1+0.14)^5
PV Factor = 1 / 1.925
PV Factor = 0.519
3,000 x 0.519 = 1,557
We add this to the NPV.
3,232 + 1,557 = 4,789
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