MUST SHOW ALL WORK AJ Inc. is contemplating the following investment: Cost of In
ID: 2491237 • Letter: M
Question
MUST SHOW ALL WORK
AJ Inc. is contemplating the following investment:
Cost of Investment
$ 124,000
Estimated Life
3 Years
Annual Net Cash Flows:
Year 1
$ 58,000
Year 2
$ 50,000
Year 3
$ 44,000
Estimated Salvage Value
$ 10,000
Assume AJ Inc.’s cost of capital is 8%.
Required:
Calculate the NPV of this Investment.
Cost of Investment
$ 124,000
Estimated Life
3 Years
Annual Net Cash Flows:
Year 1
$ 58,000
Year 2
$ 50,000
Year 3
$ 44,000
Estimated Salvage Value
$ 10,000
Explanation / Answer
PV of cash outflow = Initial investment = $124000
PV of cash inflow
Year 1 = $58000 * 0.9259259259 = $53703.703702
Year 2 = $50000 * 0.8573388203 = $42866.941015
Year 3 = $44000 * 0.7938322410 = $34928.618604
Estimated salvage value = $10000 * 0.7938322410 = $7938.322410
Total PV of cash inflow = $139437.58573
Therefore NPV = PV of cash inflow - PV of cash outflow = $139437.58573 - $124000 = $15437.58573
NPV of this investment = $15437.58573
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