Question

Peng Company is considering an investment expected to generate an average net income after taxes of $1,950 for three years. The investment costs $45,000 and has an estimated $6,000 salvage value. Assume Peng requires a 15% return on its investments. Compute the net present value of this investment. Assume the company uses straight-line depreciation. (PV of $1, FV of $1, PVA of $1, and FVA

Answer 1

NPV =$(36,602.61)

Step-by-step explanation:

The Net present value (NPV) is the difference between the Present value (PV) of cash inflows and the PV of cash outflows. A positive NPV implies a good and profitable investment project and a negative figure implies the opposite.

NPV = PV of cash inflows - PV of cash outflows

PV of cash inflow= A × (1- (1+r)^(-n)/r

A- net cash inflow 1,950, r- discount rate- 15%, n- number of years- 3

PV of cash inflows = 1,950 × ((1- (1.15)^(-3))/0.15

= 4,452.28

PV of scrap value = F ×(1+r)^(-n)

F- Scrap value - 6000, r- discount rate = 15% n- number of years- 3

PV of scrap value = 6,000 ×(1.15)^(-3)=3,945.09

NPV = 4,452.28 + 3,945.097 - 45,000

= (36,602.61)

NPV =$(36,602.61)