Question: Net Present Value Analysis complete the table and answer the questions that follow. Assume: Capital Expenditure = $50,000 (i.e., the costs of the investment) Useful
- Net Present Value Analysis complete the table and answer the questions that follow.
Assume:
Capital Expenditure = $50,000 (i.e., the costs of the investment)
Useful life of expenditure = 5 years
Annual return from expenditure = $9,000 (i.e., the benefits of the investment)
Value of investment at the end of the analysis period = $16,000
Discount rates to compare = 5% and 10%, compounded annually
Use the formula (as discussed in Chapter 13):
Present Value = Future Value divided by [ (1 plus the discount rate)^n ]
Where n = the number of years into the future
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| A | B | A plus B | What are the present values of future cash flows in Year Zero (i.e., now, if I make this investment today), assuming each of these discount rates? | |
| Year | Capital Invest & Salvage Value | Annual Return in revenues from investment | Net Cash Flow (+ or -) | 5% Discount | 10% Discount |
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0
| Initial Investment = $50,000 | n.a. |
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1
| $0.00 | $9,000 |
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2
| $0.00 | $9,000 |
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|
|
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3
| $0.00 | $9,000 |
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|
|
|
4
| $0.00 | $9,000 |
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5
| $16,000 = salvage value at end of Year 5 | $9,000 |
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|
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| Totals | n.a. | n.a. |
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Based upon your estimates, would you proceed with the project at a discount rate of 5%? At a discount rate of 10%. Explain why.
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