Question

Third State Bank wants to add a new branch office. It has determined that the cost of construction of the new facility will be $1.5 million with another $500,000 in organizational costs. The bank has estimated that it will generate $319,522 per year in net revenues for 20 years. If Third State requires a 17% return on its money, what is this project's net present value?

Answer 1

$298,206

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 + salvage value - initial investment

where,

The Initial investment is $1,500,000

All yearly cash flows would be

= Annual net operating cash inflows × PVIFA for 20 years at 17%

= $319,522 × 5.6278

= $1,798,206

Refer to the PVIFA table

Now put these values to the above formula

So, the value would equal to

= $1,798,206 - $1,500,000

= $298,206