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 56,000 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 20,720 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 45,007 dollars. The cost of capital for this project is 10.82 percent.

Explanation / Answer

Solution.

Calculation for net present value.

If project end in 4 year.

If project end in 3 year.

We don,t take income tax effect on cash inflow because tax rate not given in question.

Year A Cash flow PV Factore @10.82% PV 0 (56,000.00) 1.0000         (56,000.00) 1     20,720.00 0.9023            18,695.66 2     20,720.00 0.8142            16,870.22 3     20,720.00 0.7347            15,222.98 4     65,727.00 0.6630            43,577.00 PV            38,365.87

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