Question

Corner Restaurant is considering a project with an initial cost of $211,600. The project will not produce any cash flows for the first three years. Starting in Year 4, the project will produce cash inflows of $151,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 18.6 percent. What is the project's net present value?

Answer 1

$16,810

Step-by-step explanation:

Given;

Initial cost = $211,600

No cash produced for first 3 years

cash inflows of $151,000 a year for three years

Discount rate = 18.6% = 0.186

Now,

Year Cash flows Present value factor Present value of cash flows

0 $211,600 1 $211,600

1 $0 0.843 $0

2 $0 0.711 $0

3 $0 0.599 $0

4 $151,000 0.505 $76,255

5 $151,000 0.426 $64,326

6 $151,000 0.359 $54209

Total Present Value of cash flows (year 0 - (year 1 to 6))

= $211,600 - ( 0 + 0 + 0 + $76,255 + $64,326 + $54209 )

= $16,810

Thus,

Net present value of the project is $16,810

Note:

Present value factor =
`\frac{\textup{1}}{\textup{(1+r)}^n}`

Here,

r is the discount rate

n is the year

Present value of cash = Cash flow × Present value factor