Question by Ralphy08: How do i find the net present value of this problem?
Evans Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows:

In addition, Evans Company would need to purchase equipment costing 5,000. The equipment would have a 12 year life and a ,000 salvage value. The company’s required rate of return is 10%.

The net present value of the project is closest to:

a)4,090
b)2,065
c)9,090
d)9,090

i put a) but got it wrong, how do you solve this and what is the correct answer? Thanks.
sorry, here is the net cash flows…

Year 1-10=0,000
Year 11=$(30,000)
Year 12=0,000

I don’t understand! Help! Thanks =)

Best answer:

Answer by John
The Net Present Value (NPV) of the project is the sum of the present value of each of the cash flows.

The first is easy because it happens immediately – there’s no discount, and it’s an outflow so it has a negative sign –

-275,000

The second cash flow is an inflow of 100,000, but this is assumed to happen at the end of year 1, so has to be discounted – it isn’t worth 100,000 today because the business has to wait for it.

The calculation for this is (100,000)/(1+10%)^1 = 90909.09

i.e. (cash flow)/(1+interest rate)^years

I’ll do year 2 as well –

(100,000)/(1+10%)^2 = 82644.63

Do this for all the cash flows. Don’t forget that year 11 is negative, and that year 12 is 135,000 because you have to add the salvage value in.

When you have worked out the present value of each year’s cash flow, and added them all together, you have the answer.

I got 371,957, which would be nearest to answer (b).

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