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Corner Restaurant is considering a project with an initial cost of $211,600. The project will not produce any cash flows for the first three years. Starting in Year 4, the project will produce cash inflows of $151,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 18.6 percent. What is the project's net present value?

Respuesta :

Answer:

$16,810

Explanation:

Given;

Initial cost = $211,600

No cash produced for first 3 years

cash inflows of $151,000 a year for three years

Discount rate = 18.6% = 0.186

Now,

Year    Cash flows       Present value factor       Present value of cash flows

0          $211,600                       1                                        $211,600

1           $0                       0.843                                           $0

2          $0                       0.711                                             $0

3          $0                       0.599                                           $0

4          $151,000            0.505                                           $76,255

5          $151,000            0.426                                           $64,326

6          $151,000            0.359                                           $54209

Total Present Value of cash flows  (year 0 - (year 1 to 6))

=  $211,600 - ( 0 + 0 + 0 + $76,255 + $64,326 + $54209  )  

= $16,810

Thus,

Net present value of the project is $16,810

Note:

Present value factor = [tex]\frac{\textup{1}}{\textup{(1+r)}^n}[/tex]

Here,

r is the discount rate

n is the year

Present value of cash = Cash flow × Present value factor

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