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	$	36,000
2		66,000
3		96,000
4		96,000
5		116,000

This schedule includes all cash inflows from the project, which will also require an immediate $216,000 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 28 percent? (Round PV factor to 3 decimal places. Negative amount should be indicated by a minus sign.)

Net Present Value

b. What is the net present value of the project if the appropriate discount rate is 8 percent? (Round PV factor to 3 decimal places. Negative amount should be indicated by a minus sign.)

Net Present Value

Answer 1

(a) Calculation of Net Present Value:-

Year	Cash flows (a)	PVF@28% (b)	Present value (a) x (b)
0	(216,000)	1	(216,000)
1	36,000	0.781	28,116
2	66,000	0.610	40,260
3	96,000	0.477	45,792
4	96,000	0.373	35,808
5	116,000	0.291	33,756
Net Present Value			- $32,268

Therefore, NPV @28% = - $32,268

(b) Calculation of Net Present Value:-

Year	Cash flows (a)	PVF@8% (b)	Present value (a) x (b)
0	- 216,000	1	- 216,000
1	36,000	0.926	33,336
2	66,000	0.857	56,562
3	96,000	0.794	76,224
4	96,000	0.735	70,560
5	116,000	0.681	78,996
Net Present Value			$99,678

Therefore, NPV @8% = $99,678