Question

Kingsolver Corporation has provided the following data concerning an investment project that it is considering:

Initial investment $450,000
Working capital $16,000
Annual cash flow $133,000
per year Salvage value at the end of the project $6,000
Expected life of the project 3
years Discount rate 8%
Use Excel or a financial calculator to solve.
The working capital would be released for use elsewhere at the end of the project.
The net present value of the project is closest to:_______--

Answer 1

- $105,791

Step-by-step explanation:

The computation of the Net present value is shown below

= Present value of all yearly cash inflows after applying discount factor - initial investment + working capital

The discount factor should be computed by

= 1 ÷ (1 + rate) ^ years

where,

rate is 8%

Year = 0,1,2,3,4 and so on

Discount Factor:

For Year 1 = 1 ÷ 1.08^1 = 0.926

For Year 2 = 1 ÷ 1.08^2 = 0.857

For Year 3 = 1 ÷ 1.08^3 = 0.794

So, the calculation of a Present value of all yearly cash inflows are shown below

= Year 1 cash inflow × Present Factor of Year 1 + Year 2 cash inflow × Present Factor of Year 2 + Year 3 cash inflow × Present Factor of Year 3

= $133,000 × 0.926 + $133,000 × 0.857 + $155,000 × 0.794

= $123,158 + $113,981 + $123,070

= $360,209

The cash inflow in year 3 would be

= $133,000 + $6,000 + $16,000

= $155,000

So, the Net present value equals to

= $360,209 - $450,000 + $16,000

= $360,209 - $466,000

= - $105,791

We take the first three digits of the discount factor.