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X Company is considering producing and selling a new product with a useful life of six years. New...

Question:

X Company is considering producing and selling a new product with a useful life of six years. New equipment costing $1,000,000 will have to be purchased. At the end of six years, the equipment can be sold for $22,000. In each of the first three years, cash flows from this product will be $210,000; in each of the remaining years, cash flows will decrease to $187,000.

If the discount rate is 5%, the net present value for this new product is:

Net Present Value:

Net present value method is a capital budgeting technique whereby the net value added to shareholders' wealth by undertaking a given project is determined. If the calculated net present value of the given project is positive, the project is accepted and if it is zero or negative, the project is rejected.

Answer and Explanation:

The calculated net present value of the given new product is $11,789.12.

Here, the cash flows from time t=1 through t=3 is $210,000 for each year and...

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How to Calculate Net Present Value: Definition, Formula & Analysis

from Financial Accounting: Help and Review

Chapter 5 / Lesson 20
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