Thunder Corporation, an amusement park, is considering a capital investment in a

Question

Thunder Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $152,835 and have an estimated useful life of 6 years. It will be sold for $63,100 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $26,000. The company's borrowing rate is 8%. Its cost of capital is 10%. Click here to view PV table. Calculate the net present value of this project to the company and determine whether the project is acceptable. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to O decimal places, e.g. 125.)

Explanation / Answer

Solution:

Cash flows

X

10% discount factor

=

Present value

Present value of net annual cash flows

26,000

X

4.355261

=

113,236.8

Present value of salvage value

63,100

x

0.5645

35,618.3

148,855.1

Capital investment

152,835

Net present value

3,980

Since the net present value is positive, the project is acceptable

Cash flows

X

10% discount factor

=

Present value

Present value of net annual cash flows

26,000

X

4.355261

=

113,236.8

Present value of salvage value

63,100

x

0.5645

35,618.3

148,855.1

Capital investment

152,835

Net present value

3,980

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