Question

a project will produce operating cash inflows of $61,000 per year for 10 years in a row. the initial fixed asset investment in the project will be $94,000. the net aftertax salvage value is estimated at $7,000 and will be received during the last year of the project's life. what is the net present value of the project if the required rate of return is 14.5 percent?

Answer 1

NPV is $219,878 at 14.5 percent

Step-by-step explanation:

Our initial cash flow (CF0) is -94,000
then our first cash flow (CF1) is 61,000 for 9 years (not 10 because...)
our second cash flow (CF2) is 68,000 (61k operating +7k aftertax salvage)

First with our formula,

NPV = CF0 + [CF1/(1+r)] + [CF1/(1+r)^2] ... [CF1/(1+r)^9] + [CF2/(1+r)^10

In words, you take your 61k cash flow over the 9 years and discount it, then take the 68k cash flow in the 10th year and discount it, and subtract the initial investment.

With a BAII Plus calculator,

You go to your cash flow function,

CF0= -94,000
C01 = 61,000

F01 = 9
C02 = 68,000

F02 = 1

Click the NPV key,
I =14.5

NPV CPT

and you get 219,878

As per the expert answer that is also here, you should also realize that it must be incorrect because it is not logical for a project that produces $610,000 in nominal cash flows over 10 years, and costs $94,000 to only be worth $28k after discounting. (28k wasn't even an option on my homework for this problem).If you are still unsure how I got my answer then you can try seeing your professor or TA for extra help.