Bill plans to open a do-it-yourself dog bathing center in a storefront. The bathing equipment will cost $160,000. Bill expects the after-tax cash inﬂows to be $40,000 annually for seven years, after
Which he plans to scrap the equipment and retire to the beaches of Jamaica.
Assume the required return is 10%. What is the project's NPV?
A) $14,111
B) $27,322
C) $32,556
D) $34,737
E) $45,001

Question

Quizplus · Accepted Answer

To calculate NPV, we need to discount the cash inflows by the required return, and subtract the initial investment:

CF1 = $40,000
CF2 = $40,000
CF3 = $40,000
CF4 = $40,000
CF5 = $40,000
CF6 = $40,000
CF7 = $40,000 + $160,000 = $200,000 (includes salvage value)

NPV = - $160,000 + ($40,000 / 1.1) + ($40,000 / 1.1^2) + ($40,000 / 1.1^3) + ($40,000 / 1.1^4) + ($40,000 / 1.1^5) + ($40,000 / 1.1^6) + ($200,000 / 1.1^7)

NPV = $34,737

Therefore, the best choice is D. The project has a positive NPV of $34,737, which means that it is expected to generate value for the investors and should be undertaken.

Bill Plans to Open a Do-It-Yourself Dog Bathing Center in a Storefront