Neville Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $174,777 and have an estimated useful life of 9 years. It will be sold for $69,200 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $25,600. The company's borrowing rate is 8%. Its cost of capital is 10%. Calculate the net present value of this project to the company.
How would you calculate this using a financial calculator? (I use a HP 10B II). I know there is an easier process to solving this kind of problem. Since this uses annual cash flows we can use the CFj key. . .Thanks for any help!
To calculate the net present value (NPV) of the project using a financial calculator like the HP 10B II, you would follow these steps:
Step 1: Clear any previous calculations by pressing the "C" or "AC" button.
Step 2: Set the calculator to financial mode by pressing the "f" button followed by the "P/Y" button. This will ensure that the calculator assumes one payment per year.
Step 3: Enter the initial cash outflow (cost of the exhibit) as a negative value: -174777. This represents the money going out of the company.
Step 4: Calculate the net annual cash flows by subtracting the incremental cash outflow from the incremental cash inflow: 25600 - 0 (since there is no incremental cash outflow).
Step 5: Calculate the net cash inflow at the end of the project's life by adding the proceeds from selling the exhibit to the net cash inflow during the project's life: 69200 + 25600.
Step 6: Set the calculator to "NPV" mode by pressing the "f" button followed by the "IRR/NPV" button.
Step 7: Enter the interest rate or cost of capital as the discount rate: 10.
Step 8: Enter the net annual cash flows as follows: Press the "CFj" button, enter 9 (to represent the 9-year life of the project), press the "f" button, and enter the net annual cash flow (25600) as positive.
Step 9: Enter the net cash inflow at the end of the project's life as follows: Press the "f" button, enter 1 (to represent the one-time inflow at the end), press the "f" button, and enter the net cash inflow (94800) as positive.
Step 10: Calculate the NPV by pressing the "CPT" button followed by the "NPV" button. The calculator should display the net present value of the project.
That's it! You have now calculated the net present value of the project using your HP 10B II financial calculator.