Thunder Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $136,000 and have an estimated useful life of 5 years. It can be sold for $60,000 at the end of that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $25,000. The company’s borrowing rate is 8%. Its cost of capital is 10%. Calculate the net present value of this project to the company. Compute net present value of an investment and consider intangible benefits.
Thunder Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $136,000 and have an estimated useful life of 5 years. It can be sold for $60,000 at the end of that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual
Compute net present value of an investment and consider intangible benefits.
Net Present Value
By contrasting the present value of the future cash flows the investment will create to its initial cost, Net Present Value (NPV), a financial term, can be used to assess an investment's profitability. It is a typical technique for investment analysis and capital budgeting. Calculating the NPV is done as follows:
- Determine the anticipated future cash flows that will be produced by the investment over the course of its useful life. These cash flows may consist of earnings, savings, and other advantages.
- Discounting the anticipated cash flows: The anticipated cash flows are then reduced to present value using a discount rate, which symbolizes the opportunity cost of funding the project as opposed to a different, equally risky investment. The cost of capital for the company or the rate of return demanded by investors is often the discount rate.
- Subtract the initial investment cost to get the net present value (NPV): The initial investment cost is then subtracted from the present value of the anticipated cash flows to get the NPV.
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