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    Net Present Value and Salvage Value

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    For the questions below, I need to know

    i) When to multiply the net cash flows by the present value. For example do I do 160000*0.8929 and then 130000*0.7972 and so on, or do I multiply the net values only by 160000?

    ii) Do I multiply the salvage value of 45000* by the fifth year of the present value, add it to the total net present value and then subtract my answer to 360000 to get the present value?


    Atlantic Company is considering investing in specialized equipment costing $360,000. The equipment has a useful life of 5 years and a residual value of $45,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:
    Year 1 | $160,000
    Year 2 | 130,000
    Year 3 | 100,000
    Year 4 | 55,000
    Year 5 | 40,000
    Total: $485,000

    Atlantic Company's required rate of return is 12%.

    1. Calculate the net present value of the investment. Show how you arrived at your answer.

    2. Does the net present value that you calculated indicate a return equal to, higher than, or lower than 12%?
    A) Equal to 12%
    B) Higher than 12%
    C) Lower than 12%
    D) Cannot be determined from the given data

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    Solution Preview

    1) You have to do the net cash flows by present value. This will be: 160000*.8929 ...