Star City is considering an investment in the community center that is expected

Question

Star City is considering an investment in the community center that is expected to return the following cash flows: Use Exhibit A.8.

This schedule includes all cash inflows from the project, which will also require an immediate $214,000 cash outlay. The city is tax-exempt; therefore, taxes need not be considered.

a. What is the net present value of the project if the appropriate discount rate is 24 percent? (Round PV factor to 3 decimal places. Negative amount should be indicated by a minus sign.)

b. What is the net present value of the project if the appropriate discount rate is 14 percent? (Round PV factor to 3 decimal places. Negative amount should be indicated by a minus sign.)

Year Net Cash Flow 1 $ 34,000 2 64,000 3 94,000 4 94,000 5 114,000

Explanation / Answer

Answer a )

Net present value of the project using discount rate = 24 %

Answer b )

Net present value of the project using discount rate = 14 %

Year( A) Net cash Outflow($) (B) PVIF @ 24 % (C) Amount ($) [D = B*C] Initial outlay -214,000 1 -214,000 1 34,000 0,806 27,404 2 64,000 0.650 41,600 3 94,000 0.524 49,256 4 94,000 0.423 39,762 5 114,000 0.341 38,874 Net present value of the project - $17,104

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