Written Assignment Unit 3 Principle of Finance 2

In order to expand its bottled water business, a local company is considering the
acquisition of additional equipment. It plans to buy the equipment. The total cost of the
equipment (as one initial payment at the beginning of the project) is $200,500. During
the time span of its use, the equipment is expected to produce net cash inflows of
$67,000 each year. The equipment is expected to be used for 4 years, then re-sold in
the used-equipment market for $25,000. The discount rate (the rate of return
assumption for the project) is 12%. What is the net present value (NPV) of this project?

12%
Period FV FV Annuity PV PV Annuity
1 1.120 1.000 0.893 0.893
2 1.254 2.120 0.797 1.690
3 1.405 3.374 0.712 2.402
4 1.574 4.779 0.636 3.037
5 1.762 6.353 0.567 3.605
6 1.974 8.115 0.507 4.111
7 2.211 10.089 0.452 4.564
8 2.476 12.300 0.404 4.968
9 2.773 14.776 0.361 5.328
10 3.106 17.549 0.322 5.650

The NPV is $18,946.

The following table showing NPV calculation-

Year
s Cash flow (A) PVIF(B) PV(A x B)
0 -$200,500 1 -$200,500
1 $67,000 0.893 $59,831
2 $67,000 0.797 $53,399
3 $67,000 0.712 $47,704
4 $92,000 0.636 $58,512
$18,946
NPV =$58,512 + $47,704 +$53,399 + $59,831 – $200,500 = $18,946
Hence, the NPV is $18,946.