Question

Davis Chili Company is considering an investment of $50,000, which produces the following inflows:

Year	Cash Flow
1	$	22,000
2		21,000
3		18,000

Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

A. Determine the net present value of the project based on a zero percent discount rate.

B. Determine the net present value of the project based on a 10 percent discount rate. (Do not round intermediate calculations and round your answer to 2 decimal places.)

C. Determine the net present value of the project based on a 18 percent discount rate. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

Answer 1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

a.Present value of inflows=(22000+21000+18000)=$61000

NPV=Present value of inflows-Present value of outflows

=61000-50000

=$11,000

b.Present value of inflows=(22000/1.1+21000/1.1^2+18000/1.1^3)=$50879.04

NPV=Present value of inflows-Present value of outflows

$50879.04-50000

$879.04(Approx).

c.Present value of inflows=(22000/1.18+21000/1.18^2+18000/1.18^3)=$44681.30

NPV=Present value of inflows-Present value of outflows

=44681.30-50000

=$(5318.70)(Approx)(Negative).