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P11-1 (similar to) Question Help ?(Related to Checkpoint? 11
P11-1 (similar to)
Question Help
?(Related to Checkpoint? 11.1) ? (Net present value?calculation) Dowling Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of
?$6,000,000
and would generate annual net cash inflows of
?$1,200,000
per year for
9
years. Calculate the? project's NPV using a discount rate of
7
percent.
If the discount rate is
7
?percent, then the? project's NPV is
?$nothing.
?(Round to the nearest? dollar.)
Expert Solution
We have been provided the initial cash outlay ofr the new factory building and the net cash inflows generated from the factory each year for 9 years. The discount rate is 7%. We are required to calculate the NPV of the project.
Please find below the table showing present value of cash flows given:
| Year | Now | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
| Cash flows [A] | (6,000,000) | 1,200,000 | 1,200,000 | 1,200,000 | 1,200,000 | 1,200,000 | 1,200,000 | 1,200,000 | 1,200,000 | 1,200,000 |
| Present value factor @7% [B] | 1.00 | 0.93 | 0.87 | 0.82 | 0.76 | 0.71 | 0.67 | 0.62 | 0.58 | 0.54 |
| Present value of cash flows [A]*[B] | (6,000,000) | 1,121,495 | 1,048,126 | 979,557 | 915,474 | 855,583 | 799,611 | 747,300 | 698,411 | 652,720 |
Note - 1) The cash flows represents inflows and outflows. The outflows are presented in brackets.
2) The present value factor is calculated using 1 / (1+r)^n. For e.g PV factor at year 2 will be 1/ (1.07)^2 = 0.87
The NPV of the project will be equal to the sum of present value of all cash flows, which is shown below:
Net Present Value of project = - 6,000,000 + 1,121,495 + 1,048,126 + 979,557 + 915,474 + 855,583 + 799,611 + 747,300 + 698,411 + 652,720
= $ 1,818,279
Hence, the project should be accepted since it has positive NPV of $ 1,818,279.
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