Question

Star City is considering an investment in the community center that is expected to return the following cash flows. Use Exhibit A.8.

Year	Net Cash Flow
1	$	22,000
2		52,000
3		82,000
4		82,000
5		102,000

This schedule includes all cash inflows from the project, which will also require an immediate $202,000 cash outlay. The city is tax-exempt; therefore, taxes need not be considered.

Required:

a. What is the net present value of the project if the appropriate discount rate is 20 percent?

b. What is the net present value of the project if the appropriate discount rate is 10 percent?

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Answer 1

Solution a:

Computation of NPV
Particulars	Amount	Period	PV Factor (20%)	Present Value
Cash Outflows:
Cost of Equipment	$202,000.00	0	1	$202,000
Present Value of Cash Outflows (A)				$202,000
Cash Inflows:
Year 1	$22,000.00	1	0.83333	$18,333
Year 2	$52,000.00	2	0.69444	$36,111
Year 3	$82,000.00	3	0.57870	$47,454
Year 4	$82,000.00	4	0.48225	$39,545
Year 5	$102,000.00	5	0.40188	$40,992
Present Value of Cash Inflows (B)				$182,434
Net Present Value (B-A)				-$19,566

Solution b:

Computation of NPV
Particulars	Amount	Period	PV Factor (10%)	Present Value
Cash Outflows:
Cost of Equipment	$202,000.00	0	1	$202,000
Present Value of Cash Outflows (A)				$202,000
Cash Inflows:
Year 1	$22,000.00	1	0.90909	$20,000
Year 2	$52,000.00	2	0.82645	$42,975
Year 3	$82,000.00	3	0.75131	$61,608
Year 4	$82,000.00	4	0.68301	$56,007
Year 5	$102,000.00	5	0.62092	$63,334
Present Value of Cash Inflows (B)				$243,924
Net Present Value (B-A)				$41,924