Farragut Company is evaluating an opportunity to invest $45,000 in new manufacturing equipment. It will have a useful life of 3 years, and will generate $20,000 cash flows at the end of Year 1, $30,000 of cash flows at the end of Year 2, and $10,000 of cash flows at the end of Year 3. If Farragut uses a discount rate of 5%, what is the NPV of the project?

Question

Quizplus · Accepted Answer

To calculate NPV, we need to discount each cash flow back to present value and subtract the initial investment. Using a discount rate of 5%, the present value of the cash flows are:
Year 1: $20,000 / (1 + 0.05)^1 = $19,047.62
Year 2: $30,000 / (1 + 0.05)^2 = $26,462.63
Year 3: $10,000 / (1 + 0.05)^3 = $8,678.08
Then we add up the present values of the cash flows and subtract the initial investment:
NPV = -$45,000 + $19,047.62 + $26,462.63 + $8,678.08 = $9,188.33.
Since the NPV is positive, investing in the new manufacturing equipment would be a good decision for Farragut Company.

Farragut Company Is Evaluating an Opportunity to Invest $45,000 in New