Question

A company is considering investing in a project that costs $300,000. The company uses straight-line depreciation and estimates that the project has a useful life of 10 years with no salvage value. This project is expected to produce NET INCOME of $42,000 each year. Assuming a minimum rate of return of 10%, indicate the NET PRESENT VALUE of this project.

a. $41,928
b. $258,072
c. $120,000
d. $142,409

Answer 1

b. $258,072

Step-by-step explanation:

PERIOD CASH FLOW NET PRESENT VALUE

Year 1 $42,000
`(42000)/((1 + 0.10)^(1)) = 38181.82`

Year 2 $42,000
`(42000)/((1 + 0.10)^(2)) = 34710.74`

Year 3 $42,000
`(42000)/((1 + 0.10)^(3)) = 31555.22`

Year 4 $42,000
`(42000)/((1 + 0.10)^(4)) = 28686.57`

Year 5 $42,000
`(42000)/((1 + 0.10)^(5)) = 26078.70`

Year 6 $42,000
`(42000)/((1 + 0.10)^(6)) = 23707.91`

Year 7 $42,000
`(42000)/((1 + 0.10)^(7)) = 21552.64`

Year 8 $42,000
`(42000)/((1 + 0.10)^(8)) = 19593.31`

Year 9 $42,000
`(42000)/((1 + 0.10)^(9)) = 17812.10`

Year 10 $42,000
`(42000)/((1 + 0.10)^(10)) = 16192.82`

Total $258,071.83

Answer 2

NPV = $-41,928.18

Step-by-step explanation:

Net present value is the present value of after tax cash flows from an investment less the amount invested.

NPV can be calculated using a financial calculator:

Cash flow in year 0 = $-300,000

Cash flow each year from year 1 to 10 = $42,000

I = 10%

NPV = $-41,928.18

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you