Ask Question
20 July, 19:50

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 $5,000,000 and would generate annual net cash inflows of $1,000,000 per year for eight years. Calculate the project's NPV using a discount rate of 9%.

+1
Answers (1)
  1. 20 July, 21:40
    0
    The NPV is $534,819.11

    Explanation:

    The computation of the Net present value is shown below

    = Present value of all yearly cash inflows after applying discount factor - initial investment

    The discount factor should be computed by

    = 1 : (1 + rate) ^ years

    where,

    rate is 9%

    Year = 0,1,2,3,4 and so on

    Discount Factor:

    For Year 1 = 1 : 1.09^1 = 0.9174

    For Year 2 = 1 : 1.09^2 = 0.8417

    For Year 3 = 1 : 1.09^3 = 0.7722

    For Year 4 = 1 : 1.09^4 = 0.7084

    For Year 5 = 1 : 1.09^5 = 0.6499

    For Year 6 = 1 : 1.09^6 = 0.5963

    For Year 7 = 1 : 1.09^7 = 0.5470

    For Year 8 = 1 : 1.09^8 = 0.5018

    So, the calculation of a Present value of all yearly cash inflows are shown below

    = Year 1 cash inflow * Present Factor of Year 1 + Year 1 cash inflow * Present Factor of Year 1 + Year 1 cash inflow * Present Factor of Year 1 + Year 1 cash inflow * Present Factor of Year 1 + Year 1 cash inflow * Present Factor of Year 1 + Year 1 cash inflow * Present Factor of Year 1 + Year 1 cash inflow * Present Factor of Year 1 + Year 1 cash inflow * Present Factor of Year 1

    = $1,000,000 * 0.9174 + $1,000,000 * 0.8417 + $1,000,000 * 0.7722 + $1,000,000 * 0.7084 + $1,000,000 * 0.6499 + $1,000,000 * 0.5963 + $1,000,000 * 0.5470 + $1,000,000 * 0.5018

    = $917,431.19 + $841,679.99 + $772,183.48 + $708,425.21 + $649,931.39 + $596,267.33 + $547,034.24 + $501,866.28

    = $5,534,819.11

    So, the Net present value equals to

    = $5,534,819.11 - $5,000,000

    = $534,819.11

    We take the first four digits of the discount factor.
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “present value calculation) Dowling Sportswear is considering building a new factory to produce aluminum baseball bats. This project would ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers