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A company intends to invest in building a TV assembly factory in China
A company intends to invest in building a TV assembly factory in China. It is estimated that the investment will be 312,700 yuan, and the net cash benefit after tax will be 100,000 yuan per year. However, by the end of the fifth year, the assets of this factory will be free of charge according to the agreement All land will be transferred to the Chinese government. If the company’s opportunity cost of capital is 12%, what is the net present value of this foreign company? Is this investment worthwhile? NPV = TPV-C0 Net present value = total present value of net cash benefit-net cash investment
Expert Solution
In the given problem investment is negative cash flow and it will be done in year '0'. The benefit of this will be from year '1' to year '5'. The opportunity cost of capital is rate of interest.
The Net Present Value of this investment can be calculated by -
NPV = - 312,700 yuan + 100,000 yuan*(P/A, 12%, 5)
= - 312,700 yuan + 100,000*[{(1+0.12)^5 - 1}/{0.12(1+0.12)^5}]
= - 322,700 yuan + 100,000 yuan*3.60477
= - 322,700 yuan + 360,477 yuan
= 37,777 yuan.
The Net Present Value of this company is 37,777 yuan. (Answer).
As the NPV of this investment > 0 , the project is viable can be taken by company.
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