Question

$400,000 capital investment proposal has an estimated life of 4 years and no residual value. The estimated net cash flows are as follows: Year Net Cash Flow 1 $200,000 2 150,000 3 90,000 4 80,000​ The minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively.​ Determine the net present value.

Answer 1

Net present value = $13,110

Explanation:

The computation of the net present value is shown below:

Years Cash flows Present value factor Present value

0 -$400,000 1 -$400,000 (A)

1 $200,000 0.893 $178,600

2 $150,000 0.797 $119,550

3 $90,000 0.712 $64,080

4 $80,000 0.636 $50,880

Net present value $13,110 (B - A)