Question

Vanilla Bean Restaurant is considering a project with an initial cost of $525,000. The project will not produce any cash flows for the first three years. Starting in year 4, the project will produce cash inflows of $721,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 16 percent. What is the project's net present value

Answer 1

Answer:

Vanilla Bean Restaurant

The project's net present value (NPV) is:

$511,798

Explanation:

a) Data and Calculations:

Initial project cost = $525,000 in year 1

Project's inflows in Year 4, 5, & 6 = $721,000 each

Discount rate = 16%

Present value of inflows:

Year 4 = $721,000 * 0.552 = $397,992

Year 5 = $721,000 * 0.476 = $343,196

Year 6 = $721,000 * 0.410 = $295,610

Total present value =          $1,036,798

Therefore, the NPV = $511,798 ($1,036,798 - $525,000).  The present value is the difference between the present value of the project's cash inflows and the present value of project's cash outflows during the project's life.