Magic Corporation, an amusement park, is considering a capital investment in a n

Question

Magic Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $146,561 and have an estimated useful life of 8 years. It will be sold for $66,200 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $22,100. The company’s borrowing rate is 8%. Its cost of capital is 10%.

Calculate the net present value of this project to the company and determine whether the project is acceptable. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value to 0 decimal places, e.g. 125.)

Explanation / Answer

NPV of the project

= PV of cash inflow – PV of cash outflow

= $22100 x PVIFA (10%, 8) + $66200 x PVIF (10%, 8) - $146561

= $22100 x 6.71008 + $ 66200 x 0.46319 - $146561

= $178955.95 - $146561

= $32395 (rounded to zero decimal place)

As NPV is positive, the company should accept the project.

Note: as there is no tax, depreciation will have no tax advantage and hence it has not been considred in calculation.

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