Question

A company is considering investing in a project that costs $300,000. The company uses straight-line depreciation and estimates that the project has a useful life of 10 years with no salvage value. This project is expected to produce NET INCOME of $42,000 each year. Assuming a minimum rate of return of 10%, indicate the NET PRESENT VALUE of this project.
a. $41,928
b. $258,072
c. $120,000
d. $142,409

Answer 1

Answer:

NPV = $-41,928.18

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:

Cash flow in year 0 = $-300,000

Cash flow each year from year 1 to 10 = $42,000

I = 10%

NPV = $-41,928.18

To find the NPV using a financial calacutor:

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

I hope my answer helps you

Answer 2

Answer:

b. $258,072

Explanation:

PERIOD              CASH FLOW                   NET PRESENT VALUE

Year 1                       $42,000                         $\frac{42000}{(1 + 0.10)^{1}} = 38181.82$

Year 2                      $42,000                         $\frac{42000}{(1 + 0.10)^{2}} = 34710.74$

Year 3                      $42,000                         $\frac{42000}{(1 + 0.10)^{3}} = 31555.22$

Year 4                      $42,000                         $\frac{42000}{(1 + 0.10)^{4}} = 28686.57$

Year 5                      $42,000                         $\frac{42000}{(1 + 0.10)^{5}} = 26078.70$

Year 6                      $42,000                         $\frac{42000}{(1 + 0.10)^{6}} = 23707.91$

Year 7                      $42,000                         $\frac{42000}{(1 + 0.10)^{7}} = 21552.64$

Year 8                      $42,000                         $\frac{42000}{(1 + 0.10)^{8}} = 19593.31$

Year 9                      $42,000                         $\frac{42000}{(1 + 0.10)^{9}} = 17812.10$

Year 10                     $42,000                        $\frac{42000}{(1 + 0.10)^{10}} = 16192.82$

Total                                                                          $258,071.83