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Opportunity Cost of Capital and Capital Budgeting

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P3-7 Northern Sun, Inc. net present value and payback

P3-26 Present value of depreciation tax shield for a machine

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This solution helps answer questions regarding the opportunity cost of capital and capital budgeting.

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P3-7 a. Net Present Value = PV of cash inflows - Initial Investment
The discounting rate is 10%
PV of inflows = 55/1.1 + 190/1.1^2 + 240/1.1^3 + 190/1.1^4 = 517.11
Initial investment = 355
NPV = 517.11 - 355 = 162.11
This is the NPV at the end of year 1
For NPV now, we need to discount this value for ...

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