Question

Thunder Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $221,476 and have an estimated useful life of 12 years. It can be sold for $61,600 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 $29,100. 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, eg. 125.) Net present value $ The project

Answer 1

Calculation of NPV of the project
year	0	1	2	3	4	5	6	7	8	9	10	11	12
Annual Cashflow	-221476	29100	58200	87300	116400	145500	174600	203700	232800	261900	291000	320100	410800
Discounting factor at 10%	1	0.909	0.826	0.751	0.683	0.621	0.564	0.513	0.467	0.424	0.386	0.350	0.319
Present value	-221476	26455	48099	65590	79503	90344	98557	104530	108603	111071	112193	112193	130894
NPV	866556
866556

annual cash flows will increase by 29100 per year, 12 th year cashflows will be (29100*12)+61600= 410800.

it should be discounted using companies cost of capital 10%.

as project gives a positive NPV the project should be accepted.

It will increase the share holders wealth by $866555.