Question

You are the manager of 5 Company is considering the purchase of a new printer. Relevant information concerning the equipment follows. Assume that there is no tax savings from depreciation for simplicity, What is the NPV of this project?

Cost of printer:-$1,000
Expected revenue from sale of printed material: $500 annually for 3 years
WACC is 10%

a 13228
b 0
c $243.43
d $500.00
e $1,500.00

Answer 1

To calculate the NPV, discount the annual revenues from the printer at the WACC of 10% for each year, sum these present values, and subtract the initial investment. The NPV of the project is $243.43, which corresponds to option c.

Step-by-step explanation:

The student's question is about calculating the Net Present Value (NPV) of a project where a company considers purchasing a new printer. To calculate NPV, we must discount the future cash flows from the project at the company's Weighted Average Cost of Capital (WACC) and then subtract the initial investment.

Calculation Steps

1. Identify the cash flows from the project, which in this case are $500 annually for 3 years.
2. Discount each cash flow back to present value using the WACC of 10%.
3. Subtract the initial investment of $1,000 from the sum of the discounted cash flows.

To calculate each year's present value (PV), we use the formula: PV = FV / (1 + WACC)n, where FV is the future value of the cash flow and n is the number of years in the future the cash flow is received.

Example Calculation for Year 1

PV year 1 = $500 / (1 + 0.10)1 = $454.55

Example Calculation for Year 2

PV year 2 = $500 / (1 + 0.10)2 = $413.22

Example Calculation for Year 3

PV year 3 = $500 / (1 + 0.10)3 = $375.66

The sum of these PVs is the total PV of the cash flows: $454.55 + $413.22 + $375.66 = $1,243.43

Finally, we subtract the initial investment to get the NPV: $1,243.43 - $1,000 = $243.43.

The correct option for the NPV of this project is therefore c $243.43.