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 $209,558 and have an estimated useful life of 10 years. It will be sold for $71,000 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $30,000. The company’s borrowing rate is 8%. Its cost of capital is 10%. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) 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). Round present value to 0 decimal places, e.g. 125.)

Please show work and how the answer was achieved.

Net present value $

Explanation / Answer

Appropriate discount rate is the cost of capital ie 10%

Year Cash flow Discount Factor 10% 0 -209558 1 -209558 1 to 10 30000 6.1446 184337 10 17000 0.3855 6554 Net present value -18667

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