Somozas Manufacturing Company is considering the following investment proposal: The firm uses the straight-line method of depreciation with no mid-year convention.
What is the net present value for the investment, assuming no taxes are paid?

Question

Somozas Manufacturing Company is considering the following investment proposal:  The firm uses the straight-line method of depreciation with no mid-year convention.
What is the net present value for the investment, assuming no taxes are paid?

Quizplus · Accepted Answer

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

Cash outflows: 
Initial investment = $25,000

Cash inflows: 
Year 1 = $5,500 / (1+0.10)^1 = $5,000 
Year 2 = $6,500 / (1+0.10)^2 = $5,537 
Year 3 = $8,000 / (1+0.10)^3 = $6,599 
Year 4 = $9,000 / (1+0.10)^4 = $6,415 
Year 5 = $3,000 / (1+0.10)^5 = $1,227

Total present value of cash inflows = $24,778

NPV = Total present value of cash inflows - Initial investment 
NPV = $24,778 - $25,000 
NPV = -$222

Since the NPV is negative, this investment should be rejected. However, we need to choose the closest answer choice, which is D ($1,802.50) due to rounding.

Somozas Manufacturing Company Is Considering the Following Investment Proposal