Question

7. Grupo Brasilia is considering expanding a production line. The new equipment for the line will cost $60,000. In addition, the cost of installation is $3,000 and there is an annual maintenance contract for $5,000. The new line is expected to generate cash flows for the next four years of 12,000, 17,000, 24,000, and 28,000. GB's discount rate for the project is 7 5/8%. The net present value of the project is closest to:

Answer 1

Answer: $2,950

Step-by-step explanation:

The Net Present Value results from when you subtract the present value of all costs from the present value of benefits.

The Initial cost of the equipment is,

= 60,000+ 3,000 (installation )

= $63,000

= 5/8

= 0.625

= 7.625% discount rate

Year 1

Present Value = 17,000/(1+ 7.625%)

= $11,149.83

Year 2

Present Value = 17,000/(1 + 7.625%)^2

= $14,676.50

Year 3

Present Value = 24,000/(1+7.625%)^3

= $19,251.82

Year 4

Present Value = 28,000 / (1+7.625%)^4

= $20,869.18

Net Present Value = $11,149.83 + $14,676.50 + $19,251.82 + $20,869.18 - $63,000

= $2,950.33

= $2,950

The Maintenance costs were already included in the Cash Flow projections for the 4 years.

Net Present Value is therefore $2,950