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 $204,212 and have an estimated useful life of 11 years. It will be sold for $64,700 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $27,400. 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. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to 0 decimal places, e.g. 125.)

Net present value $

Explanation / Answer

NPV is $ 238695, project is acceptable as it has positive NPV

We have to consider the cost of capital as it contains all sources of funds.

Year Cash Flow PVF at 10% Present Value 0 (204,212.00)      1.0000            (204,212) 1        64,700.00      0.9091                 58,818 2        64,700.00      0.8264                 53,471 3        64,700.00      0.7513                 48,610 4        64,700.00      0.6830                 44,191 5        64,700.00      0.6209                 40,174 6        64,700.00      0.5645                 36,521 7        64,700.00      0.5132                 33,201 8        64,700.00      0.4665                 30,183 9        64,700.00      0.4241                 27,439 10        64,700.00      0.3855                 24,945 11        64,700.00      0.3505                 22,677 11        64,700.00      0.3505                 22,677 NPV              238,695

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