Written assignment unit 3

University of the people

Bus 4404 Principles of finance 2

Instructor: Dr. Rebecca Attah

Due Date: Wednesday 27th September 2023

The net present value of NPV is given by the formula

NPV = cash flow/(1+i)^n.

The residual value is given by the formula

NPV = cash flow/(1+i0^t

Cash flow = 67,000 per year.

I = rate of return = 12% = 0.12

Residual value = 25,000

Initial investment = 200,500

Therefore NPV = 67,000/(1+0.12)^1 + 67,000/(1+0.12)^2 + 67,000/(1+0.12)^3 +

67,000/(1+0, 12)^4 + 25,000/(1+0.12) ^4 – 200,500 = 59821.43 + 53411.99 + 47689.28

+42579.71 + 15887.95 – 200500 = 219,390.36 – 200,500 = 168890

So the NPV FOR THE PROJECT IS 18890.

Thus, a positive NPV value indicates that the project can be implemented by making the

acquisition of the equipment profitable.

Using the table given in the question, we can also calculate the NPV as follows

FOR YEAR 1 = Cash Flow * PV = 67,000 * 0.893 = 59831.

IN YEAR 2 = CASH FLOW * PV = 67,000 * 0.797 = 53,399.

IN YEAR 3 = CASH FLOW * PV = 67,000* 0.712 = 47,704.

IN YEAR 4 = CASH FLOW * PV = 67,000 * 0.636 = 42,612

Total NPV = 203.546

Therefore, NPV = 203546- 200,500 = 3,046

Adding the residual value of the equipment = 15,887.95 + 3,046 = 18,933.92

Therefore, NPV = 18934. A positive value indicates that the equipment acquisition project

can proceed as it would be profitable.

References

Boundless. (2023, February 18). Boundless Finance. Available

at https://www.coursesidekick.com/finance/study-guides/boundless-finance

Corporate Finance. (2008). BookBoon: Ventus Publishing ApS. Available at

http://my.uopeople.edu/pluginfile.php/56304/mod_page/content/7/CorporateFinanceBasic.pdf

Nielsen, K.M. (2010). Corporate Finance: Part II - Budgeting, Financing & Valuation. BookBoon:

Ventus Publishing ApS. Available at

http://my.uopeople.edu/pluginfile.php/56304/mod_page/content/7/CorporateFinanceII.pdf