Question

A firm is considering a project that has the following estimated cashflows:

• Increased sales to business of $160,000 for the next 5 years (starting in one year's time).
• Increased costs of $20,000 for the next five years (starting in one year's time).
• The initial capital expenditure required is $100,000, and salvage value at the end of 5 years is expected to be $30,000.
• Cost of the feasibility study is $10,000.

If the firm is facing a discount rate of 11%, what is the NPV of this project?

Ignore taxes.

		$435,229
		$425,229
		$567,229
		$373,229

Answer 1

A.435,229.

net increase in cash flows = 160,000 - 20,000 =>140,000.

present value of annuity factor = [1-(1+r)^(-n)]/r

=>[1-(1.11)^(-5)]/0.11

=>3.69589727.

present value factor for 5th year @11%

=>1/(1.11)^5

=>0.59345133.

year	cash flow	discounting factor	cash flow * discounting factor
0	(100,000)	1	(100,000)
1-5	140,000	3.69589727 (present value of annuity factor)	517,425.618
5	30,000	0.59345133	17,803.54
		NPV	435,229