Answer:
Net present value = -$26,489.24 to 2 decimal places
Explanation:
In this question, we are tasked with calculating the net present value of the project.
We proceed as follows;
The following parameters are identified from the question;
Initial fixed asset investment = $2,220,000
Annual depreciation = Initial fixed asset investment/years of tax life = 2,220,000 / 3 = $740,000
Operating cash flow = ( sales - costs - depreciation)( 1 - tax rate) + depreciation
Operating cash flow = ( 2,190,000 - 1,180,000 - 740,000)( 1 - 0.3) + 740,000 = $929,000
Net present value = present value of cash outflows - present value of cash inflows
Net present value = -2,220,000 + [929,000 / ( 1 + 0.13)^1]+ [929,000 / ( 1 + 0.13)^2 ]+ [929,000 / ( 1 + 0.13)^3
]}
= -2,220,000 + (822,123.894 + 727,543.269 + 643,843.601) =
-$26,489.236
Which is -$26,489.24 to 2 decimal places
