What is the NPV of project A? The project would require an initial investment in

Question

What is the NPV of project A? The project would require an initial investment in equipment of 73,000 dollars and would last for either 3 years or 4 years (the date when the project ends will not be known until it happens and that will be when the equipment stops working in either 3 years from today or 4 years from today). Annual operating cash flows of 22,630 dollars per year are expected each year until the project ends in either 3 years or 4 years. In 1 year, the project is expected to have an after-tax terminal value of 52,485 dollars. The cost of capital for this project is 11.19 percent.

Explanation / Answer

All Amounts in $ There will be two NPV calculations for the project, depending on the life cycle (3 years and 4 years) For 3 years, the NPV will be $ 14,800.62 For 4 years, the NPV will be $ 25,008.15

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