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29 June, 16:06

7. Grupo Brasilia is considering expanding a production line. The new equipment for the line will cost $60,000. In addition, the cost of installation is $3,000 and there is an annual maintenance contract for $5,000. The new line is expected to generate cash flows for the next four years of 12,000, 17,000, 24,000, and 28,000. GB's discount rate for the project is 7 5/8%. The net present value of the project is closest to:

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  1. 29 June, 17:44
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    Answer: $2,950

    Explanation:

    The Net Present Value results from when you subtract the present value of all costs from the present value of benefits.

    The Initial cost of the equipment is,

    = 60,000 + 3,000 (installation)

    = $63,000

    = 5/8

    = 0.625

    = 7.625% discount rate

    Year 1

    Present Value = 17,000 / (1 + 7.625%)

    = $11,149.83

    Year 2

    Present Value = 17,000 / (1 + 7.625%) ^2

    = $14,676.50

    Year 3

    Present Value = 24,000 / (1+7.625%) ^3

    = $19,251.82

    Year 4

    Present Value = 28,000 / (1+7.625%) ^4

    = $20,869.18

    Net Present Value = $11,149.83 + $14,676.50 + $19,251.82 + $20,869.18 - $63,000

    = $2,950.33

    = $2,950

    The Maintenance costs were already included in the Cash Flow projections for the 4 years.

    Net Present Value is therefore $2,950
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