Question

The following data pertain to an investment proposal (Ignore income taxes.): Cost of the investment$34,000 Annual cost savings $10,000 Estimated salvage value$5,000 Life of the project 5years Discount rate 11% Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. The net present value of the proposed investment is closest to: (Round your intermediate calculations and final answer to the nearest whole dollar amount.)
a) $5,925
b) $2,960
c) $2,965
d) $19,000

Answer 1

Answer:

NPV  = $5,926.226

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 and profitable investment project and a negative figure implies the opposite.  

NPV = PV of cash inflows - PV of cash outflows  

PV of annual savings= A×   (1- (1+r)^(-n))/r

r- discount rate- 11%, n- number of years- 5, A- annual savings

    = 10,000 × (1- 1.11)^(-5) )/0.11 = 36,958.97

PV of scrap value = F × (1+r)^(-n)

r- discount rate- 11%, n- number of years- 5, F- salvage value - 5,000

     5,000× (1.11)^(-5)= 2,967.256

NPV =   36,958.97018  + 2,967.256 - 34,000

       = 5,926.226

NPV  = $5,926.226