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    Calculating NPV of a given investment proposal

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    Cannondale is considering a modification to one of their products. The change will have an immediate cost to Cannondale of $50,000, but is expected to raise revenues by $40,000 next year and $45,000 the year after that.

    The increase in manufacturing costs due to this change are expected be $5,000 per year. These numbers are approximate (after-tax), and no forecasting is done beyond the second year. Cannondale typically requires a rate of return of 10%. What is the NET present value (PV) of this change, considering only the next two years?

    a. $0.00
    b. $33,057.85
    c. $14,876.03
    d. $114,876.03

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    Solution Preview

    Please refer attached file for better clarity of table.

    Cash flows
    Current investment=$50,000
    Net cash flow at the end of year 1= ...

    Solution Summary

    Solution describes the steps to calculate NPV in the given case.