Question

Hadden corporation is evaluating a capital investment opportunity. this project would require an initial investment of​ $45,000 to purchase equipment. the equipment will have a residual value at the end of its life of​ $2,000. the useful life of the equipment is 6 years. the new project is expected to generate additional net cash inflows of​ $22,000 per year for each of the six years. the​ company's required rate of return is​ 12%. the net present value of this project is closest​ to:

Answer 1

The Net Present Value (NPV) of Hadden corporation's project is calculated by determining the present value of expected cash inflows and the equipment's residual value, then subtracting the initial investment, while using a discount rate of 12% over 6 years.

The Net Present Value (NPV) is a financial metric used to evaluate the profitability of an investment or project. To calculate NPV, you need to first find the present value of the expected net cash inflows, then subtract the initial investment. Here's a step-by-step calculation for the Hadden corporation's project:

1. Calculate the present value of cash inflows: PV = Cash inflow per year × [(1 - (1 + r)-n) / r], where 'r' is the discount rate (12% or 0.12) and 'n' is the number of years (6).
2. Calculate the residual value's present value, which also needs to be factored in: Residual PV = Residual value / (1 + r)n.
3. Add the present value of the cash inflows and the residual value.
4. Subtract the initial investment from the total present value calculated in step 3.

The NPV for the Hadden corporation's project can be calculated using a financial calculator or software with built-in NPV functions, which takes into account the discount rate, the series of cash inflows, and the residual value to provide the NPV result.