Homework SourseIgnore income taxes in this problem The following data perta
(Ignore income taxes in this problem.) The following data pertain to an investment proposal:
Use Excel or financial calculator to solve.
The net present value of the proposed investment is closest to:
$34,000
$5,880
$1,136
$4,744
| Cost of the investment | $58,000 |
| Annual cost savings | $16,000 |
| Estimated salvage value | $8,000 |
| Life of the project | 5 years |
| Discount rate | 11% |
Solution
Present value factor
= 1 / (1 + r) ^ n
Where,
r = Rate of discounting = 11% or 0.11
n = Years = 0 to 5
So, PV Factor for year 2 will be
= 1 / (1.11) ^ 2
= 1 / 1.2321
= 0.811622
Similarly, other calculations are shown in the following table
So, as per above calculations, the Net Present Value is closest to $5,880 and so option B is the correct option
| Calculations | Particulars | ||||||
| Years | 0 | 1 | 2 | 3 | 4 | 5 | |
| A | Cost of the investment | -58000 | 0 | 0 | 0 | 0 | 0 |
| B | Annual cost savings | 0 | 16000 | 16000 | 16000 | 16000 | 16000 |
| C | Estimated Salvage Value | 0 | 0 | 0 | 0 | 0 | 8000 |
| D = A+B+C | Net Cash Flows | -58000 | 16000 | 16000 | 16000 | 16000 | 24000 |
| E | Present value factor | 1 | 0.900901 | 0.811622 | 0.731191 | 0.658731 | 0.593451 |
| F = D x E | Present values | -58000 | 14414.41 | 12985.96 | 11699.06 | 10539.7 | 14242.83 |
| G = Sum F | Net Present Value | 5882 |
