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 $147,150 and have an estimated useful life of 6 years. It will be sold for $68,000 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $24,000. 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. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to 0 decimal places, e.g. 125.) Net present value $__________________The project acceptable.

Explanation / Answer

The discount rate that would be used to calculate the NPV is the cost of capital of the company that is 10%.

NPV of the project

= PV of cash inflows - PV of cash outflows

= $24000 x PVIFA(10%,6) + $68000 x PVIF (10%, 6) - Initial Investment

= $24000 x 4.35525 + $68000 x 0.56447 - $147150

= ($4240)

The project is not acceptable

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