Answer:
To calculate the Net Present Value (NPV) of the project, we need to discount the future cash inflows and outflows to their present values using the given discount rate of 7%.
The initial expenditure on equipment is $10,500,000. The annual net cash inflows from reduced costs of operations are $3,500,000 per year for 9 years. In year 9, the investment cash inflow totals $4,400,000 ($3,500,000 + $0.9 million salvage value).
We can use the following formula to calculate the NPV:
NPV = (Initial investment) + Σ [Cash inflow / (1 + discount rate)^n]
where Σ denotes the summation, and n is the year.
Let's calculate the NPV:
Initial investment = -$10,500,000 (negative because it's an expenditure)
Cash inflows (discounted) for years 1 to 8:
Σ [Cash inflow / (1 + discount rate)^n] = $3,500,000 × [1 - (1 + 0.07)^(-8)] / 0.07 ≈ $20,416,067
Cash inflow (discounted) for year 9:
$4,400,000 / (1 + 0.07)^9 ≈ $2,297,216
Now, let's sum up all the values:
NPV = (-$10,500,000) + $20,416,067 + $2,297,216 ≈ $12,213,283
If the discount rate is 7 percent, then the project's NPV is approximately $12,213,283.