Question

Violet Sky Shipping is evaluating a 1-year project that would involve an initial investment in equipment of $30,400 and an expected cash flow of $31,700 in 1 year. If Violet Sky Shipping were to borrow money to raise the $30,400 to pay for the project, what is the NPV of the project?

Answer 1

The NPV of the project is -$1,581.82, indicating that the project is not financially viable.

Step-by-step explanation:

The NPV (Net Present Value) of a project is a measure of its profitability and is calculated by subtracting the initial investment from the present value of the expected cash flows. In this case, Violet Sky Shipping is considering a 1-year project with an initial investment of $30,400 and an expected cash flow of $31,700 in 1 year.

To calculate the NPV, we need to discount the cash flow back to its present value. Assuming a discount rate of 10%, we can use the formula:

NPV = Cash Flow / (1 + Discount Rate)^n - Initial Investment

Plugging in the values:

NPV = $31,700 / (1 + 0.10)^1 - $30,400

Simplifying the equation:

NPV = $31,700 / 1.10 - $30,400

NPV = $28,818.18 - $30,400

NPV = -$1,581.82

Therefore, the NPV of the project is -$1,581.82, which indicates that the project is not financially viable.