Answer:
NPV for A = $673,867.69
NPV for B = $418,923.12
Explanation:
Net present value is the present value of after-tax cash flows from an investment less the amount invested.
NPV can be calculated using a financial calculator
For A
It is cash flows not income that is used to determine net present value.
Cash flow = net income + depreciation
Straight line depreciation expense = (Cost of asset - Salvage value) / useful life
($684,000 - $60,000) / 6 = $104,000
$200,000 + $104,000 = $304,000
Cash flow in year 0 = $-684,000
Cash flow each year from year 1 to 5 = $304,000
Cash flow in year 6 = $304,000 + $60,000 = $364,000
I = 10 %
NPV = $673,867.69
B
Straight line depreciation expense = (Cost of asset - Salvage value) / useful life
($480,000 - $40,000) / 8 = $55,000
$110,000 + $55,000 = $165,000
Cash flow in year 0 = $-480,000
Cash flow each year from year 1 to 7 = $165,000
Cash flow in year 8 = $165,000 + $40,000 = $205,000
I = 10 %
NPV = $418,923.12
To find the NPV using a financial calculator:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.
3. Press compute
