Peng Company is considering an investment expected to generate an average net income after taxes of $1,950 for three years. The investment costs $45,000 and has an estimated $6,000 salvage value. QS 24-8 Net present value LO P3 Assume Peng requires a 15% return on its investments. Compute the net present value of this investment. Assume the company uses straight-line depreciation. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your present value factor to 4 decimals.)

NPV = $-6920.68

Explanation:

The Net present value (NPV) is the difference between the Present value (PV) of cash inflows and the PV of cash outflows. A positive NPV implies a good and profitable investment project and a negative figure implies the opposite.  

NPV = PV of total cash inflows - PV of cash outflows  

PV of annual cash inflows

Annual cash inflow = Net income + annual depreciation

Annual depreciation = (cost - salvage value)/3= (45000-6000)/3=13,000

Annual cash inflow = 1,950 + 13,000=14,950

PV of annual cash inflow= A ×  (1+r)^(-n)

A- annual cash inflow, r -rate of interest, n-number of years

PV of average net income = 14,950 × (1- 1.15^(-3) )/ 0.15 =34,134.2155

PV of  salvage value

= Salvage Value × (1+r)^(-n) ) =

r- interest rate, n- number of years

= 6000 × 1.15^(-3) = 3945.097

PV of total cash inflow = 34134.2155  + 3,945.097=38079.3129

NPV = 38079.3129  - 45,000=  -6920.687104

NPV = $-6,920.687

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