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 $148,066 and have an estimated useful life of 8 years. It will be sold for $73,900 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $21,700. The company's borrowing rate is 8%. Its cost of capital is 10%. (For calculation purposesuse 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.)

Explanation / Answer

NPV

= $21700 x PVIFA(10%, 8) + $73900 x PVIF (10%, 8) - $148066

= $21700 x 5.335 + $73900 x 0.467 - $148066

= $2214.8

The project is acceptable

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