Answer:
NPV = $27,792
Explanation:
Net Present Value = Present Value of Future Cash Flows - Initial Investments
To compute the Present value of Future Cash Flows, we need to first compute the cash inflows during the life of the project:
Year 1: 2,100 * 20 = $42,000
Year 2: 2,100 * 20 = $42,000
Year 3: 2,100 * 20 = $42,000
The units of Year 4 and Year 5 are calculated as follows:
⇒ (0.5 * 1,400) + (0.5 * 2,500) = 1,950 units
Year 4: 1,950 * 20 = $39,000
Year 5: 1,950 * 20 = $39.000
Now, discount the cash inflows at a rate of 12% to calculate the Present Value of Future Cash Flows
⇒ <u>42,000 </u>+ <u>42,000</u>+ <u>42,000</u> + <u>39,000</u> + <u>39,000</u>
(1.12)^1 (1.12)^2 (1.12)^3 (1.12)^4 (1.12)^5
⇒ 37,500 + 33,482 + 29,895 + 24,785 + 22,130
⇒ $147,792
Net Present Value = Present Value of Future Cash Flows - Initial Investments
NPV = 147,792 - 120,000
NPV = $27,792
