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 $195,029 and have an estimated useful life of 10 years. It will be sold for $60,000 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $27,300. 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

Explanation / Answer

Year 0 Initial investment (195,029) Net annual cashflow        27,300 PV annuity factor(10 yrs, 10%) 6.1446 Pv of cash inflows     167,747 Sale value        60,000 PF interest factor(10 yrs, 10%) 0.3855 Present value of sale value        23,133 Total cash inflow     190,879 Net Present value        (4,150) (-195029+190879) since the NPV is negative the project is not acceptable

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