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 $136,000 and have an estimated useful life of 5 years. It will be sold for $65,000 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $25,000. The company’s borrowing rate is 8%. Its cost of capital is 10%.

Click here to view the factor table.

(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

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.)

Net present value $

Explanation / Answer

NET PRESENT VALUE

AS THE NPV IS NEGATIVE THE PROJECT IS NOT ACCEPTABLE.

YEAR CASH FLOW DISCOUNTING FACTOR @ 10% DISCOUNTED CASH FLOW 0 ($136000) 1.000 ($136000) 1-5 $25000 3.7908 $94770 5 $65000 0.6209 $40359 NPV ($871)

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