Homework SourseLakeFront Company is considering investing in a new dock tha
LakeFront Company is considering investing in a new dock that will cost $560,000. The company expects to use the dock for 5 years, after which it will be sold for $300,000. LakeFront anticipates annual cash flows of $110,000 resulting from the new dock. The company\'s borrowing rate is 8%, while its cost of capital is 10%. Instructions What is the net present value of the dock and indicate whether LakeFront should make the investment? Please show work
Solution
Since the net present value is positive, LakeFront should accept the project.
| Cash Flows | × | 10% Discount Factor | = | Present Value | |
| Present value of annual cash flows | $110,000 | × | 3.79079 | = | $416,987 |
| Present value of salvage value | $300,000 | × | 0.62092 | = | $186,276 |
| $603,263 | |||||
| Capital investment | $560,000 | ||||
| Net present value | $43,263 |
