Answer:
Net present value=-$14,117.6471
Explanation:
Step 1: Determine the initial cost of the equipment
The initial cost of equipment can be expressed as;
Initial cost=Purchase cost+working capital required+Cost to construct new roads
where;
Initial cost=unknown
Purchase cost=$490,000
working capital required=$175,000
Cost to construct new roads=$55,000
replacing;
Initial cost=(490,000+175,000+55,000)=$720,000
Initial cost=$720,000
Step 2: Determine the final value of the equipment after 4 years
The final value of equipment can be expressed as;
Final value=salvage value+total net cash receipts
where;
salvage value=$80,000
total net cash receipts=annual net cash receipts×useful life
annual net cash receipts=$190,000
useful life=4 years
total net cash receipts=(190,000×4)=760,000
replacing;
Final value=(80,000+760,000)=$840,000
Step 3: Determine the present value
Using the expression;
Required rate of return=((Final value-present value)/present value}×100
where;
required rate of return=19%=19/100=0.19
Final value=$840,000
Present value=unknown=p
replacing;
0.19=(840,000-p)/p
0.19 p=840,000-p
0.19 p+p=840,000
1.19 p=840,000
p=840,000/1.19
p=705,882.3529
Step 4: Determine the net present value
Net present value=present value-initial cost
where;
present value=$705,882.3529
initial cost=$720,000
Net present value=705,882.3529-720,000=-14,117.6471
Net present value=-$14,117.6471
