Vilas Company is considering a capital investment of $190,200 in additional prod

Question

Vilas Company is considering a capital investment of $190,200 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $17,900 and $49,670, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.
Using the discounted cash flow technique, compute the net present value. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answer for present value to 0 decimal places, e.g. 125.)

Explanation / Answer

Villas Company Calculation of Present Value of inflows Year Cash Flow Discount Factor (@12%) Discounted Cashflow 1 $                                        49,670 0.89 $                    44,348 2 $                                        49,670 0.80 $                    39,597 3 $                                        49,670 0.71 $                    35,354 4 $                                        49,670 0.64 $                    31,566 5 $                                        49,670 0.57 $                    28,184 $                 1,79,049 Calculation of Net present Value A Present Value of Inflows $                 1,79,049 B Present Value of outflows $                 1,90,200 C Net Present Value (A)-(B) $                   -11,151

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