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 $171,652 and have an estimated useful life of 7 years. It will be sold for $68,700 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $28,500. The company’s borrowing rate is 8%. Its cost of capital is 10%.

Brief Exercise 24-3 Your answer is partially correct. Try again. Magic Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $171,652 and have an estimated useful life of 7 years. It will be sold for $68,700 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $28,500. 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 O decimal places, e.g. 125.) Net present value is The project acceptable Click if you would like to Show Work for this question: Open Show Woi k

Explanation / Answer

Year

CashFlow

PV Factor@ 10%

PV

0

          (171,652)

1

                (171,652.00)

1

               28,500

0.9091

                    25,909.09

2

               28,500

0.8264

                    23,553.72

3

               28,500

0.7513

                    21,412.47

4

               28,500

0.6830

                    19,465.88

5

               28,500

0.6209

                    17,696.26

6

               28,500

0.5645

                    16,087.51

7

               28,500

0.5132

                    14,625.01

7

               68,700

0.5132

                    35,253.96

NPV

                       2,351.90

As NPV is Positive Project can be acceptable

Year

CashFlow

PV Factor@ 10%

PV

0

          (171,652)

1

                (171,652.00)

1

               28,500

0.9091

                    25,909.09

2

               28,500

0.8264

                    23,553.72

3

               28,500

0.7513

                    21,412.47

4

               28,500

0.6830

                    19,465.88

5

               28,500

0.6209

                    17,696.26

6

               28,500

0.5645

                    16,087.51

7

               28,500

0.5132

                    14,625.01

7

               68,700

0.5132

                    35,253.96

NPV

                       2,351.90

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