Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $2,395,407. have a life of five years, and would produce the cash flows shown in the following table.
Year Cash Flow
1 $576,865
2 -265,251
3 742,877
4 1,041,070
5 540,325
What is the NPV if the discount rate is 15.11 percent
To calculate the Net Present Value (NPV), you need to discount the cash flows at the given discount rate and then sum them up. Here's how you can calculate the NPV:
Step 1: Identify the discount rate
In this case, the discount rate is given as 15.11 percent.
Step 2: Discount the cash flows
To discount each cash flow, divide it by the factor of (1 + discount rate)n, where n is the year of the cash flow. Let's calculate the discounted values for each year:
Year 1: $576,865 / (1 + 0.1511)¹ = $501,899.15
Year 2: -$265,251 / (1 + 0.1511)² = -$205,109.88
Year 3: $742,877 / (1 + 0.1511)³ = $538,795.10
Year 4: $1,041,070 / (1 + 0.1511)⁴ = $661,193.08
Year 5: $540,325 / (1 + 0.1511)⁵ = $276,931.68
Step 3: Calculate the sum of discounted cash flows
Now, sum up all the discounted cash flows:
NPV = $501,899.15 - $205,109.88 + $538,795.10 + $661,193.08 + $276,931.68
NPV = $1,773,708.13
The NPV at a discount rate of 15.11 percent is $1,773,708.13.