Homework Answers
Answer:
Step 1: computation of present value of cash outflows
Present Value of cash outflows (cost of project) = $ 33,000
Step 2 : Computation of Present Value of cash inflows
Present Value of cash inflows = Annual cash inflows × Present Value Annuity Factor (PVAF)
Annual cash inflows = $ 10,000
PVAF = { 1 - ( 1 + r ) ^ -n } / r
r = Discount rate = WACC = 6.56% = 0.0656
n = Number of years = 4 years
PVAF at 6.56% for 4 years = { 1 - ( 1+ 0.0656) ^ -4 } / 0.0656
= 3.42113
Present Value of cash inflows for 4 years = $ 10,000 × 3.42113
= $ 34,211.3
Step 3: Computation of Net Present Value (NPV)
NPV = Present Value of cash inflows - Present Value of cash outflows
= $ 34,211.3 - $ 33,000
= $ 1,211.3
The NPV of the project is $ 1,211.3
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