Question

Sunny Days Corporation is deciding whether to automate one phase of its production process. The equipment has a six-year life and will cost $300,000. Projected net cash inflows from the equipment are as follows: 1 Year 1 Year 2 Year 3 Year 4 Year 5 ( Year 6 S130,000 $90,000 $140.000 S130.000 $94.000 $80,000 Sunny Days Corporation's hurdle rate is 12%. Assume the residual value is zero. What is the net present value of the equipment? 12% 0.893 0.797 0.712 0.636 0.567 0.507 14% 1402 0.877 0.769 0.675 0.592 0.519 0.456 16% 0.862 0.743 0.641 0.552 0.476 0.410 Present Value of $1 Periods 10% 1 0 .909 2 0.826 0.751 0.683 0.621 0.564 sent Value of Annuity of $1 10% 0.909 1.736 2.487 3.170 3.791 6 4.355 $19.685 $164,038 S183.723 S164,038 DAWN 12% 0.893 1.690 2.402 3.037 3.805 4.111 14% 0.877 1,647 2.322 2.914 3.433 3.889 16% 0.862 1.605 2.246 2.798 3.274 3.685

Answer 1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=130,000/1.12+90,000/1.12^2+140,000/1.12^3+130,000/1.12^4+94000/1.12^5+80,000/1.12^6

=(130,000*0.893)+(90,000*0.797)+(140,000*0.712)+(130,000*0.636)+(94000*0.567)+(80,000*0.507)

=464038

NPV=Present value of inflows-Present value of outflows

=464038-300,000

=$164038