Moon city is considering an investment in the community center that is expected

Question

Moon city is considering an investment in the community center that is expected to return the following cash flows:

Year

This Schedule includes all cash inflows from the project, which will also require an immediate $180,000 cash outlay. The city is tax-exempt; therefore, taxes need not be considered.

Required:

a) What is the net present value of the project if the appropriate discount rate is 12%?

b) What is the net present value of the project if the appropriate discount rate is 10%?

Year

Net Cash Flow 1 $18,000 2 40,000 3 60,000 4 70,000 5 80,000

Explanation / Answer

a)

Statement of net present value ($) now 1 2 3 4 5 cash outlay -180000 yearly net cash flows 18000 40000 60000 70000 80000 salvage value Total cash fows -180000 18000 40000 60000 70000 80000 Discount factor (8%) 1 0.893 0.797 0.712 0.636 0.567 present value -180000 16071.43 31887.76 42706.81 44486.27 45394.15 net present value ($) 546

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