Question

Sheridan Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $177,785 and have an estimated useful life of 8 years. It can be sold for $60,000 at the end of that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $27,300. The company's borrowing rate is 8%. Its cost of capital is 10%. Calculate the net present value of this project to the company and determine whether the project is acceptable.

Answer 1

The NPV is -$4,152.23, indicating that the project is unacceptable.

The net present value (NPV) of this project, we need to consider the initial investment, annual cash flows, and the selling price at the end of the project's useful life. Here are the step-wise calculations:

1. Calculate Annual Cash Flows (Year 1-8):
   • Cash Flow per year = $27,300
2. Calculate Present Value of Annual Cash Inflows (Year 1-8):
   • PVF at 10% for 8 years = 5.3349
   • Discounted Cash Flow per year = $27,300 * 5.3349 = $145,642.77
3. Calculate Present Value of Cash Outflow (Selling Price at the end of 8 years):
   • Cash Flow at the end of 8 years = $60,000
   • PVF at 8% for 8 years = 0.4665
   • Discounted Cash Flow at the end of 8 years = $60,000 * 0.4665 = $27,990
4. Calculate Present Value of Cash Flows (Year 1-8):
   • Total Present Value of Cash Inflows = Sum of discounted cash flows = $145,642.77
   • Present Value of Cash Outflow (selling price) = $27,990
   • Total Present Value of Cash Flows = $145,642.77 + $27,990 = $173,632.77
5. Calculate Net Present Value (NPV):
   • NPV = Total Present Value of Cash Flows - Initial Investment
   • NPV = $173,632.77 - $177,785 = -$4,152.23

Therefore, the net present value (NPV) of the project is -$4,152.23. Since the NPV is negative, the project is considered unacceptable.

Answer 2

Net Present Value is -$4,152.23. The project is unacceptable because the net present value is negative.

For Year 1 - 8:

Cash flow = $27,300

PVF at 10 = 5.3349

Discounted cash flow = $27,300 * 5.3349 = $145642.77

For Year 1 - 8:

Cash flow = $60,000

PVF at 8 = 0.4665

Discounted cash flow = $60,000 * 0.4665 = $27990

The present value of cash flow is Present Value of Cash Inflow which is:

= 145642.77 + 27990

= 173632.77

Net Present Value = Present value of cash flow - Initial Investment

= $173632.77 - $177,785

= -$4,152.23

So, the project is unacceptable because the net present value is negative.