Demirjian Inc. is considering an investment project that would require an initial investment of $290,000 and that would last for 8 years. The annual cash receipts from the project would be $189,000 and the annual cash expenses would be $85,000. The equipment used in the project could be sold at the end of the project for a salvage value of $29,000. The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 7 years without any reduction for salvage value. The company uses a discount rate of 13%.
-The net present value of the project is closest to:

Question

Quizplus · Accepted Answer

To calculate the NPV of the project, we need to find the present value of all cash flows associated with the project.

First, let's calculate the annual net cash flow:

Net Cash Flow = Cash Receipts - Cash Expenses - Depreciation - Taxes
              = $189,000 - $85,000 - ($290,000/7) - 0.30[($189,000 - $85,000 - ($290,000/7))]  
              = $43,000

Next, let's find the present value of each year's net cash flow:

PV of Year 1 Net Cash Flow = $43,000 / (1 + 0.13)^1 = $38,053 
PV of Year 2 Net Cash Flow = $43,000 / (1 + 0.13)^2 = $33,684 
PV of Year 3 Net Cash Flow = $43,000 / (1 + 0.13)^3 = $29,889 
PV of Year 4 Net Cash Flow = $43,000 / (1 + 0.13)^4 = $26,570 
PV of Year 5 Net Cash Flow = $43,000 / (1 + 0.13)^5 = $23,649 
PV of Year 6 Net Cash Flow = $43,000 / (1 + 0.13)^6 = $21,064 
PV of Year 7 Net Cash Flow = $43,000 / (1 + 0.13)^7 = $18,761 
PV of Year 8 Net Cash Flow = $43,000 + $29,000 / (1 + 0.13)^8 = $25,402

Note that the salvage value of equipment sold at the end of the project is included in the cash flow for year 8.

Finally, we sum up the present values of all cash flows:

NPV = PV of Year 1 + PV of Year 2 + PV of Year 3 + PV of Year 4 + PV of Year 5 + PV of Year 6 + PV of Year 7 + PV of Year 8 - Initial Investment 
    = $38,053 + $33,684 + $29,889 + $26,570 + $23,649 + $21,064 + $18,761 + $25,402 - $290,000 
    = $121,972

Therefore, the best choice is A) $121,972.