Question

Thunder Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $195,166 and have an estimated useful life of 10 years. It can be sold for $69,400 at the end of that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $26,700. The company’s borrowing rate is 8%. Its cost of capital is 10%. Click here to view PV table.

Calculate the net present value of this project to the company and determine whether the project is acceptable. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to 0 decimal places, e.g. 125.)

Net present value

$enter the net present value in dollars rounded to 0 decimal places

Answer 1

ANSWER:

Net present value = present value of annual net cash flow - initial investment

Present value of annual net cash flow = present value of annual $26700 + present value of salvage value $69400

= ($26700 x 6.14457) + ($69400 x 0.38554)

= $164060.02 + $26756.48 = $190816.50

Where, PVAF(10%, 10) = 6.14457

PVF(10%, 10) = 0.38554

Therefore,

NPV = $190816.50 - $195166

= - $4349.50

The project is unacceptable as the NPV is negative