1 pts Question S SnapDog Inc. is considering buying a new server system with an

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1 pts Question S SnapDog Inc. is considering buying a new server system with an initial cost of $4 million. The server system will have zero salvage value at the end of its 6-year life. The project will increase after tax Operating Cash Flows (OCF's) (including appropriate depreciation) to the frm by $1.250,000 a year, as shown in the table below. If the firm requires a 14 percent rate of return what is the Net Present Value of this project? YearOCF 0 $4,000,000 1-6 $1,250,000 $725,000.84 $245,820.48 $251,860.93 $860.834.39 $981,683.39 Previous Honorlock is sharing your soreen with Stop sharing

Explanation / Answer

Just multiply the OCF with the Present value interest factor Annuity (PVIFA) at the given rate and deduct the initial investment.

NPV = (-)Initial cost + OCF per year x PVIFA (14%, 6years)

Or, NPV = (-)$4,000,000 + $1,250,000 x 3.88866751645 = $860,834.39

Note - PVIFA is computed as the sum of present value factors (PVF) for years 1 to 6. PVF is computed as           1/ (1+r)n where, n is the year for which it is computed.

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