Question

Coyne Corporation is evaluating a capital investment opportunity. This project would require an initial investment of $ 39 comma 000 to purchase equipment. The equipment will have a residual value at the end of its life of $ 2 comma 000. The useful life of the equipment is 6 years. The new project is expected to generate additional net cash inflows of $ 20 comma 000 per year for each of the six years.​ Coyne's required rate of return is 10​%. The net present value of this project is closest​ to:

Answer 1

NPV = $49,234.16

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 investment project and a negative figure implies the opposite.

NPV of an investment:

NPV = PV of Cash inflows - PV of cash outflow

Present value of cash inflows:

A × 1-(1+r)^(-n)/r

A- annual cash inflow-20,000 r-rate of return-10%, n-number of years-6

PV of cash flow = 20,000 × (1.1)^(-6)/0.1 = 87,105.21399

PV of scrap value

F× (1+r)^(-n)

F- scrap value

= 2,000× 1.1^(-6)= 1,128.94

Initial cost = $39,000

NPV = 87,105.21399 + 1,128.94 -39,000= $49,234.16

NPV = $49,234.16