Question

A project will produce an operating cash flow of $31,200 a year for 7 years. The initial fixed asset investment in the project will be $204,900. The net aftertax salvage value is estimated at $92,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 11 percent

Answer 1

Answer: $13,573.03

Explanation:

The Net Present Value of a project refers to the present value of the Cash Outflows subtracted from the present value of Cash Inflows.

It helps to check the viability of a product to see if it should be embarked on.

Cash Outflow = $204,900 which is the initial investment

Cash Inflows = Present value of $31,200 paid every year as well as the Present Value of the Salvage value of $92,000

Present Value of $31,200 annually.

Since this is a constant cashflow, it can be treated as an Annuity.

To make the calculation of an annuity faster, there exist Present Value Annuity factors that can be Multiplied with the Amount to find the present value. I have attached a table showing it.

The PVIFA for a 7 year project with an 11% discount rate is,

= 4.712

Present Value of the Inflow is therefore,

= 31,200 * 4.712

= $147,014.4

Present value of the Salvage Value is

= 92,000 / ( 1 + 11%) ^ 7

= $44,312.57

The Net Present Value is therefore,

= 147,014.40 + 44,312.57 - 204,900

= -$13,573.03

Net Present Value is a loss of ($13,583.03).