Timo Corporation, an amusement park, is considering a capital investment in a ne

Question

Timo Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $144,980 and have an estimated useful life of 9 years. It believes it can sell the exhibit for $72,400 at that time. (Amusement parks need to rotate exhibits to keep people interested.)  If the project sells the company will recoup all gains from the sale of the exhibit.   It is expected to increase net annual cash flows by $27,900. The company's borrowing rate is 8%. Its cost of capital is 10%. Its tax rate is 20%.  The exhibit will be depreciated using 5 year straight line depreciation with the half year convention.  Calculate the net present value of this project to the company.

Explanation / Answer

Ignore the 8%, use 10%

PV of Annuity of 27,900 for 8 periods at 10% = 148,844
PV of 100,300 (27,900 + 72,400) received 9 yrs from now, at 10% = 42,537

NPV = 148,844 + 42,537 - 144,980 = 46,401 Positive

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