Question

Orbit Airlines is considering the purchase of a new $275,000 maintenance hangar. The new hangar has an estimated useful life of 5 years with an expected salvage value of $50,000. The new hangar is expected to generate cost savings of $90,000 per year in each of the 5 years. A $20,000 increase in working capital will also be needed for this new hangar. The working capital will be released at the end of the 5 years. Orbit's discount rate is 18%. What is the net present value of the new hangar

Answer 1

Answer:

$17,020

Explanation:

                                         Year 0    Year 1  Year 2   Year 3   Year 4  Year 5

Initial Investment            -275,000

Expected saving value                                                                           50,000

Annual cost savings                      90,000 90,000 90,000  90,000  90,000

Working capital              -20,000

Working capital recapture                                                                      20,000

Net Cash flow                 -295,000 90,000 90,000 90,000 90,000 160,000

Discount factor at 18%          1          0.847     0.718     0.609   0.516    0.437

Present value                   -295,000 76,230 64,620 54,810  46,440  69,920  

NPV = -295,000 + 76,230 + 64,620 + 54,810 + 46,440 + 69,920 =

NPV = $17,020

So,  the net present value of the new hangar is $17,020.