Calculate the net present value and determine whether the project is acceptable.

Accounting
Tutor: None Selected Time limit: 1 Day

Magic Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $136,000 and have an estimated useful life of 5 years. It will be sold for $65,000 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $25,000. The company’s borrowing rate is 8%. Its cost of capital is 10%.

Apr 8th, 2015

Discount Rate
10%
0
1
2
3
4
 5

Cash Flows
-$136,000
$25,000
$25,000
$25,000
$25,000
$90,000

Discounted Cash Flows
-$136,000
$22,727
$20,661
$18,783
$17,075
$55,883
        
NPV
-$870




 







 







 

The project would not be accepted, since it results in a negative NPV.

Apr 8th, 2015

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