What is the NPV of project A? The project would require an initial investment in

Question

What is the NPV of project A? The project would require an initial investment in equipment of 58,000 dollars and would last for either 3 years or 4 years (the date when the project ends will not be known until it happens and that will be when the equipment stops working in either 3 years from today or 4 years from today) Annual operating cash flows of 17,400 dollars per year are expected each year until the project ends in either 3 years or 4 years. In 1 year, the project is expected to have an after-tax. terminal value of 36,048 dollars the cost of capital for this project is 6.67 percent.

Explanation / Answer

Case -1: Project Life is of 3 years Amount ($) (a) Present Value of Annual Cash Flow = Annual Cash flow*cumulative discount factor = 17400*2.6402 = 45,939 (b) Present value of terminal value of project = Terminal Value*Discount factor = 36048*.8239 = 29,700 Total of above 75,639 Less: Initial Investment 58,000 NPV 17,639 Case -2: Project Life is of 4 years Amount ($) (a) Present Value of Annual Cash Flow = Annual Cash flow*cumulative discount factor = 17400*3.4126 = 59,379 (b) Present value of terminal value of project = Terminal Value*Discount factor = 36048*.7724 = 27,843 Total of above 87,223 Less: Initial Investment 58,000 NPV              29,223 Project Life NPV ($) 3 Years 17,639 4 Years 29,223

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