Reference: 10-05
The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: $$\begin{array} { | l | l | l | }
\hline & \text { Project } X & \text { Project } Y \
\hline \text { Cost of equipment needed now } & \$ 80,000 & - \
\hline \text { Working capital requirement } & - & \$ 80,000 \
\hline \text { Annual cash operating inflows } & \$ 23,000 & \$ 18,000 \
\hline \text { Salvage value in 5 years } & \$ 6,000 & - \
\hline
\end{array}$$ Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%.
-The net present value of project X is:

Question

Reference: 10-05
The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: $$\begin{array} { | l | l | l | } 
\hline & \text { Project } X & \text { Project } Y \
\hline \text { Cost of equipment needed now } & \$ 80,000 & - \
\hline \text { Working capital requirement } & - & \$ 80,000 \
\hline \text { Annual cash operating inflows } & \$ 23,000 & \$ 18,000 \
\hline \text { Salvage value in 5 years } & \$ 6,000 & - \
\hline
\end{array}$$ Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%.
-The net present value of project X is:

Quizplus · Accepted Answer

To calculate the net present value (NPV) of Project X, we need to discount the annual cash inflows and the salvage value back to present value terms and subtract the initial investment. The formula for NPV is: $$NPV = \sum \frac{C_t}{(1+r)^t} - C_0$$ where $C_t$ is the cash inflow at time $t$, $r$ is the discount rate, and $C_0$ is the initial investment. For Project X, the initial investment is $80,000, the annual cash inflow is $23,000 for 5 years, and the salvage value at the end of year 5 is $6,000. The discount rate is 12%.The NPV calculation for Project X is as follows:- The present value of the annual cash inflows can be calculated using the formula for the present value of an annuity: $$PV = C \times \left(\frac{1 - (1 + r)^{-n}}{r}\right)$$ where $C$ is the annual cash inflow, $r$ is the discount rate, and $n$ is the number of periods. Plugging in the values: $$PV = 23,000 \times \left(\frac{1 - (1 + 0.12)^{-5}}{0.12}\right) = 23,000 \times 3.605 = 82,915$$- The present value of the salvage value is calculated by discounting it back 5 years: $$PV = \frac{6,000}{(1 + 0.12)^5} = 6,000 \times 0.567 = 3,402$$- The total present value of cash inflows (including the salvage value) is $82,915 + 3,402 = 86,317$.- Subtracting the initial investment gives the NPV: $NPV = 86,317 - 80,000 = 6,317$.Therefore, the correct answer is B) $6,317.

Reference: 10-05 the Sawyer Company Has $80,000 to Invest and Is

Reference: 10-05
the Sawyer Company Has $80,000 to Invest and Is