Question

Skyline Corp. will invest $180,000 in a project that will not begin to produce returns until the end of the 5th year. From the end of the 5th year until the end of the 12th year (8 periods), the annual cash flow will be $43,000. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Calculate the net present value if the cost of capital is 10 percent. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.) b. Should the project be undertaken? No Yes

Answer 1

first let us find the present value of annuity factors for 4 years and 12 years.@10%.

[1-(1+r)^(-n)]/r

here,

r = 0.10

n = 4 , 12

for 4 years.

[1-(1.10)^(-4)]/0.10

=>3.169865.

for 12 years

=>[1-(1.10)^(-12)]/0.10

=>6.813692

now,

present value of cash inflows of the project =$43,000*(6.813692-3.169865)

=>$156,684.561.

NPV = 156,684.561 - 180,000

=>- 23,315.44.

No.

Since the NPV is negative the project should not be taken up.