# 237 C S S A D 560

**Topics:**Net present value, Cash flow, Rate of return

**Pages:**3 (284 words)

**Published:**February 7, 2015

SOLUTION

As the numbers indicate, this would not be an economically feasible project for a number of reasons. It would take more than the projected four year life span to breakeven on the initial investment, the return on investment is a very low number (-1), and the net present value is currently projected as a number less than zero.

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Sales

30,000

33000

36300

39930

43923

48315.3

savings

15000

15000

15000

15000

15000

15000

Total cash

PV

45000

41284.4

48000

40400.6

51300

39613.8

54930

38916.04

58923

63315.3

PV = 45000 = 45000

(1+ 0.09) 1.09= 41284.4

PV2=48000 =48000= 40400.6

(1+0.09)2 1.1881

PV3= 51300 = 51300= 39613.8

(1.09)31.2950

PV4 = 54930 =54930= 38916.046

(1.09)41.4115

Now calculate NPV:

Annual operating cost = 995 + 525 + 3300 = $4820

Development cost = 18700 + 1500 + 7500 + 6650 = $34350

Total Cost = $39170

Total initial investment= sales in first year+ inventory savings+ total cost

= 30000 + 15000 + 39170

= $ 84170

NPV = -84170 + 45000 + 48000 + 51300 + 54930 1 + 0.09 (1 + 0.09)2 (1.09)3 (1.09)4

= -84170 + 41284.4 + 40400.6 +...

Please join StudyMode to read the full document