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 $143,755 and have an estimated useful life of 6 years. It will be sold for $65,500 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $25,000. 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 0 decimal places, e.g. 125.)

Explanation / Answer

Initial investment = $143,755

Life (n) = 6 years

R = 10%

Salvage value = $65500

Increase in annual cash inflows = $25000

Net present value = Present value of increased annual cash inflows + present value of salvage value – initial investment

Net present value = 25000*(1-1/(1+R)^n)/R + 65500/(1+R)^n - 143755

Net present value = 25000*(1-1/(1+10%)^6)/10% + 65500/(1+10%)^6 - 143755

Net present value = $2099.56 or $2100 approx.

Thus,

Net present value of the project = $2100

The project should be accepted since net present value is positive.

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