Exhibit 11B-2 http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-

Question

Exhibit 11B-2 http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-2.JPG

Net present value=160,190 is an incorrect answer

15 You did not receive credit for this question in a previous attempt Juliar Inc. has provided the following data concerning a proposed investment project (ignore income taxes.) 130,000 Initial investment Life of the project 16 years 30,000 Annual net cash inflows 20,000 Salvage value The company uses a discount rate of 7% Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. Required: Compute the net present value of the project. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.) Net present value 160,190

Explanation / Answer

Answer:

Initial Investment = $130,000

Life of Project (n) = 16 years

Annual Net Cash Inflows = 30,000

Salvage Value = 20,000

Discount rate (r) = 7%

Present value annuity factor (PVAF) = [ 1 - 1/(1+r)^n ] / r = [ 1 - 1/(1 + 0.07)^16 ] / 0.07 = 9.447

Present value factor for 16th year (PVIF) = 0.3387

Net Present Value = Present value of Net cash Inflows (a) - Initial Investment (b)

Present value of Net Cash inflows = Periodic Cash inflows (PVAF) + Salvage value (PVIF)

= 30,000 (9.447) + 20,000 (0.339) = 283,410 + 6,780 = $290,190

Therefore, Net Present value = 290,190 - 130,000 = $160,190

This is the correct answer as per the information given.

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