Question

I-Brew Inc. is thinking of starting a new line of coffee business: coffee trucks will deliver coffee from popular brands to customers' doors and customize coffee flavor right there. The company estimates that it will cost $487,000 to immediately invest into new delivery vehicles and coffee brewing machines. The estimated operating cash flow will equal $153,000 per year. At the end of Year 3 this pilot coffee delivery project will be over, at which time all used vehicles and equipment will be sold at the after-tax salvage value of $292,000. The company also plans to immediately set aside $45,000 in cash which will be recovered at the end of the project.
Calculate the Net Present Value of the project if the appropriate discount rate is 14%. (Increase decimal places for any intermediate calculations, from the default 2 to 6 or higher. Only round your final answer to TWO decimal places: for example, 10,000.23. Do NOT use "$" in your answer.)

Answer 1

Answer:

$50,675.10

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  

Only projects with a positive NPV should be accepted. A project with a negative NPV should not be chosen because it isn't profitable.  

When choosing between positive NPV projects, choose the project with the highest NPV first because it is the most profitable.

Cash flow in year 0 = -$487,000 +  $45,000

Cash flow in year 1 =$153,000  

Cash flow in year 2 = $153,000  

Cash flow in year 3 = $153,000 + $292,000 +  $45,000

I = 14%

NPV = $50,675.10

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