Question

Pina Compacts will generate cash flows of $32,100 in year 1, and $63,200 in year 2. However, if it makes an immediate investment of $19,000, it can instead expect to have cash streams of $55,300 in total in year 1 and $61,100 in year 2. The appropriate discount rate is 9.4 percent. (a) Calculate the NPV of the proposed project. (Enter negative amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answer to 2 decimal places, e.g. 25.25.) NPV

Answer 1

Immediate Investement = 19000

Additional Cash Inflow year 1 = 55300 - 32100 = 23200

Additional Cash Inflow year 2 = 61000 - 63200 = (-2200)

Present Value of Additional Cash Inflow = $\small \frac{Cash Flow_{1}}{(1+r)^{1}} + \frac{Cash Flow_{2}}{(1+r)^{2}}$

= $\small \frac{23200}{(1+0.094)^{1}} + \frac{-2200}{(1+0.094)^{2}}$

= 19368.40

NPV = present value of Cash Inflow - Immediate investment

= 19368.40 - 19000

= $368.40

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