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 $196,499 and have an estimated useful life of 10 years. It will be sold for $61,700 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $27,400. 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

Year 10 cash flow = 27,400 + 61,700 = 89,100

NPV = present value of cash inflows - present value of cash outflows

NPV = -196,499 + 27,400 / ( 1 + 0.1)1 + 27,400 / ( 1 + 0.1)2 + 27,400 / ( 1 + 0.1)3 + 27,400 / ( 1 + 0.1)4 + 27,400 / ( 1 + 0.1)5 + 27,400 / ( 1 + 0.1)6 + 27,400 / ( 1 + 0.1)7 + 27,400 / ( 1 + 0.1)8 + 27,400 / ( 1 + 0.1)9 + 89,100 / ( 1 + 0.1)10

NPV = -4,349.84

Since it has a negative NPV, project is not acceptable

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.