Strausberg Inc. is considering investing in a project that would require an initial investment of $270,000. The life of the project would be 4 years. The annual net cash inflows from the project would be $81,000. The salvage value of the assets at the end of the project would be $27,000. The company uses a discount rate of 10%. (Ignore income taxes.)See separate Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Compute the net present value of the project.
What will be an ideal response?
| Year | |||||||||
| Now | 1-4 | 4 | |||||||
| Initial investment | $ | (270,000 | ) | ||||||
| Annual net cash flow | $ | 81,000 | |||||||
| Salvage value | $ | 27,000 | |||||||
| Total cash flows (a) | $ | (270,000 | ) | $ | 81,000 | $ | 27,000 | ||
| Discount factor (10%) (b) | 1.000 | 3.170 | 0.683 | ||||||
| Present value of cash flows (a) × (b) | $ | (270,000 | ) | $ | 256,770 | $ | 18,441 | ||
| Net present value | $ | 5,211 | |||||||
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