Question

Allo Foundation, a tax-exempt organization, invested $200,000 in cost-saving equipment. The equipment has a five-year useful life with no salvage value. Allo estimates that the annual cash savings from this project will amount to $65,000. On investments of this type, Allo's required rate of return is 12%.The net present value of the project is closest to: Select one: a. $34,300 b. $36,400 c. $90,000 d. $125,000

Answer 1

Answer:

Net Present Value = $ 34,310.45  

Explanation:

The Net present Value (NPV ) is the difference between the present value PV of cash inflows and the PV of cash outflows. A positive NPV implies a good investment decision and a negative figure implies the opposite.  

NPV of an investment

NPV = PV of Cash inflows - PV of cash outflow  

The cash inflow is an annuity.

PV of annuity= A× 1 -(1+r)^(-n)/r  

A- Annual cash flow ,- 65,000 r - discount rate - 12%, number of years- 5

Present Value of cash inflow =65,000 × (1- (1.12)^(-5)/0.12 =  234,310.45  

Initial cost = 200,000

Net Present Value =  -  234,310.45  -200,000 = 34,310.45  

Net Present Value = $ 34,310.45