Chapter 7C, Problem 7C.1E

To determine

Concept Introduction:

The net present value if the net value of a project in today’s worth. The net present value of a project is the difference between the present value of future cash inflows and the present value of future cash outflows.

The net present value of the investment.

Answer to Problem 7C.1E

The net present value of the investment is $145,511.

Explanation of Solution

The net present value of the investment is calculated as follows:

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Initial investment (I)	$ (2,000,000)
Net operating income (A)		$ 300,000	$ 300,000	$ 300,000	$ 300,000	$ 300,000
Income tax (B) = (A*30%)		$ 90,000	$ 90,000	$ 90,000	$ 90,000	$ 90,000
Income after tax (C) = (A-B)		$ 210,000	$ 210,000	$ 210,000	$ 210,000	$ 210,000
Depreciation (D)		$ 400,000	$ 400,000	$ 400,000	$ 400,000	$ 400,000
Cash inflows after tax (E) = (C+D)		$ 610,000	$ 610,000	$ 610,000	$ 610,000	$ 610,000
Net cash flows (F) = (I+E)	$ (2,000,000)	$ 610,000	$ 610,000	$ 610,000	$ 610,000	$ 610,000
PV of $ 1(13%) (G)	1.00000	0.88496	0.78315	0.69305	0.61332	0.54276
PV = F*G	$ (2,000,000)	$ 539,823	$ 477,719	$ 422,761	$ 374,124	$ 331,084
Net present value (Sum of PVs)	$ 145,511