Thunder Corporation, an amusement park, is considering a capital investment in a

Question

Thunder Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $197,160 and have an estimated useful life of 10 years. It will be sold for $66,900 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $27,300. The company’s borrowing rate is 8%. Its cost of capital is 10%. Click here to view PV table. Calculate the net present value of this project to the company and determine whether the project is acceptable

Explanation / Answer

Net present value = Present value of inflows - Present value of outflows

Calculation of Net present value:

As the net present value of the project is positive i.e. $16998. So the project is acceptable

Particulars Amount Discounting factor (DF) Present value Annual Cash inflows 27300 cumulative DF @8% for 10 years = 6.71 183183 Sale value at 10th yr 66900 DF @8% at 10th yr. = 0.463 30975 Cash inflows 214158 Less: Cash Outflow 197160 1 197160 Net present value 16998

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