LakeFront Company is considering investing in a new dock that will cost $560,000. The company expects...
LakeFront Company is considering investing in a new dock that will cost $560,000. The company expects to use the dock for 5 years, after which it will be sold for $300,000. LakeFront anticipates annual cash flows of $110,000 resulting from the new dock. The company's borrowing rate is 8%, while its cost of capital is 10%. Instructions What is the net present value of the dock and indicate whether LakeFront should make the investment? Please show work
Homework Answers
| Cash Flows | × | 10% Discount Factor | = | Present Value | |
| Present value of annual cash flows | $110,000 | × | 3.79079 | = | $416,987 |
| Present value of salvage value | $300,000 | × | 0.62092 | = | $186,276 |
| $603,263 | |||||
| Capital investment | $560,000 | ||||
| Net present value | $43,263 |
Since the net present value is positive, LakeFront should accept the project.
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