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 $209,000 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 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 $ 29,000 2 59,000 3 89,000 4 89,000 5 109,000

Explanation / Answer

a Now 1 2 3 4 5 Initial investment -209000 Annual net cash flows 29000 59000 89000 89000 109000 PV factor 1 0.806 0.65 0.524 0.423 0.341 Present value of cash flows -209000 23374 38350 46636 37647 37169 Net present value -25824 b Now 1 2 3 4 5 Initial investment -209000 Annual net cash flows 29000 59000 89000 89000 109000 PV factor 1 0.877 0.769 0.675 0.592 0.519 Present value of cash flows -209000 25433 45371 60075 52688 56571 Net present value 31138

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