Problem 9--Net Present Value Whatley Inc. is considering investing in a project

Question

Problem 9--Net Present Value

Whatley Inc. is considering investing in a project that would require an initial investment of $460,000.  The life of the project would be 5 years.  The annual net cash inflows from the project would be $120,000.  The salvage value of the assets at the end of the project would be $69,000.  The company uses a discount rate of 15%.

Required

a.       Compute the net present value of the project.  Show your work.

b.      How much additional cash inflow would need to be generated per year to make this an attractive investment.  (Yes, that's a clue that the NPV in part (a) is negative.)

Explanation / Answer

NPV=-460000+120000/(1+0.15)+120000/(1+0.15)^2+.....+120000/(1+0.15)^5+69000/(1+0.15)^5= -$23436.1935

WE are getting a negative value of NPV.

SO lets assume cash inflow =x

So

NPV=-460000+x/(1+0.15)+x/(1+0.15)^2+.....+x/(1.15)^5+69000/(1.15)^5=3.3522x -425694.8

NPV=0 at x=$126991.38

This means we need an extra cash inflow of at least $6991.38 per year to make this attractive.

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