Coyne Corporation is evaluating a capital investment opportunity. This project would require an initial investment of $36,000 to purchase equipment. The equipment will have a residual value at the end of its life of $5000. The useful life of the equipment is 4 years. The new project is expected to generate additional net cash inflows of $19,000 per year for each of the four years. Coyne's required rate of return is 10%. The net present value of this project is closest to: Present Value of $1
Present Value of Annuity of $1

Question

Coyne Corporation is evaluating a capital investment opportunity. This project would require an initial investment of $36,000 to purchase equipment. The equipment will have a residual value at the end of its life of $5000. The useful life of the equipment is 4 years. The new project is expected to generate additional net cash inflows of $19,000 per year for each of the four years. Coyne's required rate of return is 10%. The net present value of this project is closest to: Present Value of $1
 Present Value of Annuity of $1

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the project, we need to find the present value of the cash inflows and outflows.

Cash outflow at time zero = $36,000
Residual value at the end of year 4 = $5,000

Annual net cash inflow = $19,000 per year for 4 years

To find the present value of the cash inflows, we can use the formula for the present value of an annuity:

Present value of annuity = Annual net cash inflow x Present value factor (n, r)

n = number of periods = 4
r = required rate of return = 10%

Using the present value of an annuity table, the present value factor for 4 periods at 10% is 3.1699.

So, the present value of the cash inflows is:

Present value of annuity = $19,000 x 3.1699 = $60,342.10

To find the net present value:

NPV = Present value of cash inflows - Cash outflow at time zero + Residual value

NPV = $60,342.10 - $36,000 + $5,000 = $29,342.10

Therefore, the closest answer is B) $27,645.

Coyne Corporation Is Evaluating a Capital Investment Opportunity