Question

(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 $5,500,000 and would generate annual net cash inflows of $900,000 per year for 6 years. Calculate the project's NPV using a discount rate of 5 percent. 

If the discount rate is 5 percent, then the project's NPV is $_______ (Round to the nearest dollar)

Answer 1

Calculating the Net Present Value of the project using discount rate of 5%:

Year	Cash Flows ($)	PV Factor @ 5%	Present Value ($)
0	(5,500,000.00)	1.0000	(5,500,000.00)
1	900,000.00	0.9524	857,142.86
2	900,000.00	0.9070	816,326.53
3	900,000.00	0.8638	777,453.84
4	900,000.00	0.8227	740,432.23
5	900,000.00	0.7835	705,173.55
6	900,000.00	0.7462	671,593.86
		NPV	(931,877.14)

So, the Project's NPV is - $931,877

If you need any clarification, you can ask in comments.

If you like my answer, then please up-vote as it will be motivating

Answer 2

SOLUTION :

Dowling sportswear :

Initial cost = 5500000 ($)

Discount rate , r = 5% = 0.05

=> (1 + r) = 1.05

Project generates $900000 per year for 6 years.

So,

NPV 

= - Initial cost + PV of future cash flows

= - 5500000 + 900000(1.05^6 - 1)/(0.05*1.05^6)

= - 931877 ($) 

If the discount rate is 5%, then the project’s NPV = - 931877 ($) 

(ANSWER).