Magic Corporation, an amusement park, is considering a capital investment in a n

Question

Magic Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $181,528 and have an estimated useful life of 9 years. It will be sold for $74,500 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $26,400. The company’s borrowing rate is 8%. Its cost of capital is 10%. Calculate the net present value of this project to the company and determine whether the project is acceptable

Net present value

Explanation / Answer

use annuity table (i,n)=(10%,9)=5.75902

Present value of net annual cash flows 26,400 × 5.75902 = 152,038.13
Present value of salvage value 74,500 ×1/(1+10%)^9 = 31,595.27
total= 183,633.4 (152,038.13+31,595.27)
Capital investment =181,528
Net present value= 183,633.4-181.528= 2,105.4

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