Reading Corporation is considering an investment opportunity with the following expected net cash inflows
Year 1, $250,000; Year 2, $350,000; Year 3, $395,000. At the end of Year 3, the residual value of the investment would be $50,000. The company uses a discount rate of 12%, and the initial investment is $400,000. Calculate the NPV of the investment.
Present value of $1:
11% 12% 13% 14%
1 0.901 0.893 0.885 0.877
2 0.812 0.797 0.783 0.769
3 0.731 0.712 0.693 0.675
4 0.659 0.636 0.613 0.592
5 0.593 0.567 0.543 0.519
What will be an ideal response
Net cash Present
Time inflow PV factor Value
Present value of each years' cash flow
1 $250,000 0.893 $223,250
2 350,000 0.797 278,950
3 395,000 0.712 281,240
3 Present value of residual value 50,000 0.712 35,600
Total present value of cash flows 819,040
0 Initial Investment (400,000 )
Net Present value $419,040
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