Cleveland Cove Enterprises is evaluating the purchase of an elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair. The company has narrowed their choices down to two: the B14 Model and the F54 Model. Financial data about the two choices follows. B14 Model F54 Model Investment $ 330 comma 000 $ 230 comma 000 Useful life (years) 10 10 Estimated annual net cash inflows for useful life $ 80 comma 000 $ 33 comma 000 Residual value $ 10 comma 000 $ 18 comma 000 Depreciation method Straightminusline Straightminusline Required rate of return 12% 8% What is the net present value of the B14 Model?

NPV = $125,237.6

Explanation:

Net Present Value (NPV) : This is one of the techniques available to evaluate the feasibility of an investment project. The NPV of a project is the difference between the present value of the cash inflows and the cash outflows of the project.

Net Present Value of Model B14

Present Value (PV) of annual cash inflow = A×  (1- (1+r)^(-n) )/r

 A- annual cash inflow - 80,000, r-12%, n- 10

PV of cash inflow = 80,000× ((1- (1.012)^(-10))/0.12 =  452,017.84  

PV of Scrap value = F× (1+r)^(-n)

                            = 10,000 × (1.12)^(-10)

                             = 3,219.73  

NPV = 452,017.84+ 3,219.73  - 330,000  =  125,237.57  

NPV = $125,237.6

$125,238

Explanation:

Net present value is the Net value all cash inflows and outflows in present value term. All the cash flows are discounted using a required rate of return.

                                                          B14 Model  F54 Model

Investment                                        $330,000   $230,000

Useful life (years)                                10                  10

Estimated annual net cash inflows $80,000    $33,000

Residual value                                  $10,000    $18,000

Required rate of return                      12%               8%

B14 Model  

First calculate Present value of each cash flow.

PV of Initial investment = $330,000

Present value of cash inflows = $80,000 x [ 1 - ( 1 + 12% )^-10 / 12% ] = $452,018

Present value of Residual value = $10,000 x ( 1 + 12% )^-10 = $3,220

Net present value = PV of Initial investment + Present value of cash inflows +  Present value of Residual value

NPV = $(330,000) + $452,018 + $3,220 = $125,238

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