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 $204,212 and have an estimated useful life of 11 years. It will be sold for $64,700 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. (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.)

Explanation / Answer

Net present value (NPV)

= Present Vale of cash flows + Present Value of salvage value – Estimated costs

= [ $27,400 x (PVAF 10%,11Years) ] + ($64,700 x (PVF 10%,11 Years )) – $2,04,212

= [ $27400 x 6.49506] + [ $64700 x 0.35049] - $2,04,2012

= $ 177964.67 + $ 22676.96 - $ 2,04,212

= - $3570.37

= - $3570 (Negative NPV, Rounded))

“ Since the NPV is Negative, The 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.