Santana Co. is evaluating a project requiring a capital expenditure of $790,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: YearNet IncomeNet Cash Flow1$  75,000$280,0002100,000300,0003109,000200,0004    36,000  120,000 $320,000$900,000 The company's minimum desired rate of return is 9%. The present value of $1 at compound interest of 9% for 1, 2, 3, and 4 years is 0.9174, 0.8417, 0.7722, and 0.7084 respectively. Determine the net present value of the project.  Should Santana proceed?

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Asked Dec 11, 2019
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Santana Co. is evaluating a project requiring a capital expenditure of $790,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows:

 

Year

Net Income

Net Cash Flow

1

$  75,000

$280,000

2

100,000

300,000

3

109,000

200,000

4

    36,000

  120,000

 

$320,000

$900,000

 

The company's minimum desired rate of return is 9%. The present value of $1 at compound interest of 9% for 1, 2, 3, and 4 years is 0.9174, 0.8417, 0.7722, and 0.7084 respectively.

 

Determine the net present value of the project.  Should Santana proceed?

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Calculation of NPV of Project Year 9% Factor Cash Inflow Present value Particulars D Cash Inflow $280,000 Net Cash Inflow 0.9174 $256,872 $252,510 S154,440 $85,008 S300,000 $200,000 S120,000 0.8417 0.7722 3 4 0.7084 A. Total Cash Inflow - PV $748,830 Cash Outflow Cost of Project B. Total Cash Outflow - PV $790,000 S790,000 S790,000 (S41,170) NPV (A - B)

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