Coyne Corporation is evaluating a capital investment opportunity. This project would require an initial investment of $ 39 comma 000 to purchase equipment. The equipment will have a residual value at the end of its life of $ 2 comma 000. The useful life of the equipment is 6 years. The new project is expected to generate additional net cash inflows of $ 20 comma 000 per year for each of the six years. Coyne's required rate of return is 10 %. The net present value of this project is closest to:

Question

Business

Sydney

9 October, 09:05

Coyne Corporation is evaluating a capital investment opportunity. This project would require an initial investment of $ 39 comma 000 to purchase equipment. The equipment will have a residual value at the end of its life of $ 2 comma 000. The useful life of the equipment is 6 years. The new project is expected to generate additional net cash inflows of $ 20 comma 000 per year for each of the six years. Coyne's required rate of return is 10 %. The net present value of this project is closest to:

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Hobbes · Answer 1

NPV = $49,234.16

Explanation:

The Net present value (NPV) is the difference between the Present value (PV) of cash inflows and the PV of cash outflows. A positive NPV implies a good investment project and a negative figure implies the opposite.

NPV of an investment:

NPV = PV of Cash inflows - PV of cash outflow

Present value of cash inflows:

A * 1 - (1+r) ^ (-n) / r

A - annual cash inflow-20,000 r-rate of return-10%, n-number of years-6

PV of cash flow = 20,000 * (1.1) ^ (-6) / 0.1 = 87,105.21399

PV of scrap value

F * (1+r) ^ (-n)

F - scrap value

= 2,000 * 1.1^ (-6) = 1,128.94

Initial cost = $39,000

NPV = 87,105.21399 + 1,128.94 - 39,000 = $49,234.16

NPV = $49,234.16