M11-7 Calculating Net Present Value, Predicting Internal Rate of Return [LO 11-3

Question

M11-7 Calculating Net Present Value, Predicting Internal Rate of Return [LO 11-3, 11-4] Vaughn Company has the following information about a potential capital investment: Initial investment Annual cash inflow Expected life Cost of capital $ 310,000 $75,000 7 years 14% 1. Calculate the net present value of this project. uture au rs1 Present alueo tables provided. Round the final answer to nearest whole dollar.) I huture alueAnnuity of 1 Presen Va ve nuity o $1) ise appropriate factor , from the Net Present Value

Explanation / Answer

Net Present Value = Present value of cash inflow - Present value of cash outflow

i.e. Present value of cash inflow = (CF1/ 1+ 14%) + (CF2 / (1.14)2) + ....... + (CF7/ (1.14)7)

Since in the case cash flows are similar for 7 years

Hence, Present value of cash inflow = 75000 * PVAF ( n, 14%) { Where pvaf stands for present value annuity factor}

= 75000 * 4.2883

= 321683 ($)

Net present value = 321683 - 310000

= 11683 ($) (approx)

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