Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $2,163,720. have a life of five years, and would produce the cash flows shown in the following table.
Year Cash Flow
1 $428,037
2 -295,775
3 693,596
4 1,050,918
5 800,083
What is the NPV if the discount rate is 15.22 percent? (Enter negative amounts using negative sign e.g. -45.25. Round answer to 2 decimal places, e.g. 15.25.)
NPV is $
To calculate the Net Present Value (NPV) of the cash flows, we need to discount each cash flow to its present value and sum them up.
The present value (PV) of each cash flow can be calculated using the formula:
PV = CF / (1 + r)^t
where CF is the cash flow, r is the discount rate, and t is the time period.
Let's calculate the present value of each cash flow:
Year 1:
PV1 = $428,037 / (1 + 0.1522)^1 = $428,037 / 1.1522 = $371,707.84
Year 2:
PV2 = -$295,775 / (1 + 0.1522)^2 = -$295,775 / 1.3312 = -$221,931.67
Year 3:
PV3 = $693,596 / (1 + 0.1522)^3 = $693,596 / 1.5368 = $451,029.57
Year 4:
PV4 = $1,050,918 / (1 + 0.1522)^4 = $1,050,918 / 1.7701 = $593,572.81
Year 5:
PV5 = $800,083 / (1 + 0.1522)^5 = $800,083 / 1.9823 = $403,315.95
Now, we can calculate the NPV by summing up the present values of each cash flow:
NPV = PV1 + PV2 + PV3 + PV4 + PV5 = $371,707.84 - $221,931.67 + $451,029.57 + $593,572.81 + $403,315.95
NPV = $1,598,695.50
So, the NPV is $1,598,695.50 when the discount rate is 15.22 percent.