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 $152,835 and have an estimated useful life of 6 years. It will be sold for $63,100 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $26,000. The company’s borrowing rate is 8%. Its cost of capital is 10%.

Calculate the net present value of this project to the company and determine whether the project is acceptable.

Explanation / Answer

Initial Investment = $152,835
Annual Net Cash Flows = $26,000
Residual Value = $63,100
Useful Life = 6 years
Cost of Capital = 10%

Present Value of Cash Inflows = $26,000 * PVA of $1 (10%, 6) + $63,100 * PV of $1 (10%, 6)
Present Value of Cash Inflows = $26,000 * 4.3553 + $63,100 * 0.5645
Present Value of Cash Inflows = $148,857.75

Net Present Value = Present Value of Cash Inflows - Initial Investment
Net Present Value = $148,857.75 - $152,835
Net Present Value = -$3,977.25

NPV of this project is negative. So, we should reject this project.

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