Dowling Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of $5 comma 000 comma 0005,000,000 and would generate annual net cash inflows of $1 comma 000 comma 0001,000,000 per year for 88 years. Calculate the project's NPV using a discount rate of 99 percent.
SOLUTION :
Dowling sportswear :
Initial cost = 5000000 ($)
Discount rate , r = 9% = 0.09
=> (1 + r) = 1.09
Project generates $1000000 per year for 8 years.
So,
NPV
= - Initial cost + PV of future cash flows
= - 5000000 + 1000000(1.09^8 - 1)/(0.09*1.09^8)
= 534819 ($)
If the discount rate is 9%, then the project’s NPV = 534819 ($)
(ANSWER).
Net present value = -$5,000,000 + $1,000,000/1.09 + $1,000,000/1.092 + $1,000,000/1.093 + $1,000,000/1.094 + $1,000,000/1.095 + $1,000,000/1.096 + $1,000,000/1.097 + $1,000,000/1.098
Net present value = $534,819.11
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