LakeFront Company is considering investing in a new dock that will cost $560,000

Question

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%.

Calculate the net present value of the dock. (Use the above table.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5,275.)

Indicate whether LakeFront should accept the project.

Net present value $

Explanation / Answer

Solution:

Initial investment $560,000

Annual cash flows expected for 5 Years = $110,000

Salvage value at the end of 5th year = $300,000

Here, cost of capital will be used as the discounting rate

Annual cash flows at the end of the year will be multiplied with Annuity factor of 10% from the Table 4 at 3.79079

Salvage value will be multiplied with Present value factor of 0.62092 from Table 3

Therefore, NPV is $43,263. Hence it is recommended that Lake Front should accept the project.

Particulars Year Cash Flows Discounting Factor Discounted Cash Flows Initial Inv 0 - $560,000 1 - $560,000 Annual CFs 1-5 110,000 3.79079 416,987 Salvage value 5 300,000 0.62092 186,276 Net Present Value 43,263

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