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 80,000 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 25,600 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 48,966 dollars. The cost of capital for this project is 11.16 percent.

Explanation / Answer

solution:

Will compute the NPv for 3 and 4 years both :

given problem has the terminal value after 1 year has no impact and will not consider :

NPV if project ends in 3 years is :

NPV if the projects ends in 4 years :

Both the NPV's are negative :

NPV year 3 years Cash flow Formula Discount rate @11.16% Present value 0 -80000 1 1 -80000 1 25600 1/1.1116^1 0.8996041742 23029.86686 2 25600 1/1.1116^2 0.8092876702 20717.76436 3 25600 1/1.1116^3 0.7280385662 18637.78729 Net present value -17614.58149

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