Coyne Corporation is evaluating a capital investment opportunity. This project would require an initial investment of $36,000 to purchase equipment. The equipment will have a residual value at the end of its life of $5000. The useful life of the equipment is 4 years. The new project is expected to generate additional net cash inflows of $19,000 per year for each of the four years. Coyne's required rate of return is 10%. The net present value of this project is closest to:
Present Value of $1
Periods 10% 12% 14% 16% 3 0.751 0.712 0.675 0.641 4 0.683 0.636 0.592 0.552 5 0.621 0.567 0.519 0.476 6 0.564 0.507 0.456 0.410
Present Value of Annuity of $1
Periods 10% 12% 14% 16% 3 2.487 2.402 2.322 2.246 4 3.170 3.037 2.914 2.798 5 3.791 3.605 3.433 3.274 6 4.355 4.111 3.889 3.685
Group of answer choices
$39,057.
$10,941.
$24,230.
$27,645.
To calculate the Net Present Value (NPV) of the project, we need to follow these steps:
The project generates additional net cash inflows of $19,000 per year for 4 years. We use the Present Value of Annuity of $1 table for 4 periods at a 10% discount rate.
[ PV_{\text{annuity}} = \text{Annual Cash Inflow} \times \text{PV Annuity Factor} ] [ PV_{\text{annuity}} = 19,000 \times 3.170 ] [ PV_{\text{annuity}} = 60,230 ]
The residual value of the equipment at the end of its life (4 years) is $5,000. We use the Present Value of $1 table for 4 periods at a 10% discount rate.
[ PV_{\text{residual}} = \text{Residual Value} \times \text{PV Factor} ] [ PV_{\text{residual}} = 5,000 \times 0.683 ] [ PV_{\text{residual}} = 3,415 ]
[ NPV = PV_{\text{annuity}} + PV_{\text{residual}} - \text{Initial Investment} ] [ NPV = 60,230 + 3,415 - 36,000 ] [ NPV = 27,645 ]
Therefore, the net present value (NPV) of this project is closest to:
[ \boxed{27,645} ]