In order to expand its bottled water business, a local company is considering th

Question

In order to expand its bottled water business, a local company is considering the acquisition of additional equipment. It plans to buy the equipment. The total cost of the equipment (as one initial payment at the beginning of the project) is $200,500. During the time span of its use, the equipment is expected to produce net cash inflows of $67,000 each year. The equipment is expected to be used for 4 years, then re-sold in the used-equipment market for $25,000. The discount rate (the rate of return assumption for the project) is 12%. What is the net present value (NPV) of this project?

Explanation / Answer

1) Calculation of NPV of the project :

      NPV of this project was $18,880

Year Cash flow Pvfactor@12% Present value 0 (200,500) 1 (200,500) 1 67,000 0.8928 59817.6 2 67,000 0.7972 53412.4 3 67,000 0.7117 47683.9 4 67,000 0.6355 42578.5 4 25,000 0.6355 15887.5 NPV 18880

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