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Chapter 24: Q15QS (page 1084)

A company is investing in a solar panel system to reduce its electricity costs. The system requires a cash payment of \(125,374.60 today. The system is expected to generate net cash flows of \)13,000 per year for the next 35 years. The investment has zero salvage value. The company requires an 8% return on its investments. Compute the net present value of this investment.

Short Answer

Expert verified

The NPV of the investment is $26,135.4

Step by step solution

01

Step-by-Step SolutionStep 1: Definition of investment

Investments are defined as the items or assets which are acquired with the motive of generating some income in the future.

02

Computation of net present value

Cash flow	Select chart	Amount	X	PV factor	=	Present Value

Annual cash flow	Present value of annuity	$13,000		11.6546	=	$151,510

	Immediate cash outflows					-125,374.60
	Net present value					$26135.4

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Most popular questions from this chapter

What is the average amount invested in a machine during its predicted five-year life if it costs \(200,000 and has a \)20,000 salvage value? Assume that net income is received evenly throughout each year and straight-line depreciation is used.

Following is information on an investment considered by Hudson Co. The investment has zero salvage value. The company requires a 12% return from its investments. Compute this investment’s net present value.

Investment A1

Initial investment . . . . . . . . . . . . . . . . . . . . . . . . $(200,000)

Expected net cash flows in year:

1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000

2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000

3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000

Following is information on two alternative investments being considered by Tiger Co. The company requires a 4% return from its investments.

Project X1 Project X2

Initial investment . . . . . . . . . . . . . . . . . . . . . . . . . \((80,000) \)(120,000)

Expected net cash flows in year:

1........................ 25,000 60,000

2........................ 35,500 50,000

3........................ 60,500 40,000

Compute each project’s (a) net present value and

(b) profitability index. (Round present value calculations to the nearest dollar and round the profitability index to two decimal places.) If the company can choose only one project, which should it choose? Explain.

Park Co. is considering an investment that requires immediate payment of \(27,000 and provides expected cash inflows of \)9,000 annually for four years. Assume Park Co. requires a 10% return on its investments. Based on its internal rate of return, should Park Co. make the investment?

Park Co. is considering an investment that requires immediate payment of \(27,000 and provides expected cash inflows of \)9,000 annually for four years. What is the investment’s payback period?

See all solutions

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