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Calculate Net Present Value?
This company is considering opening a new store.
Cost of property/construction of store is $2,500,000
Need to hire a manager for $60,000/year and 3 sales associates for $40,000/year
Estimated operating costs other than salaries are $70,000/year
Store is expected to generate gross profit of $600,000 in year 1-2
Store is expected to generate gross profit of $800,000 in year 3-4
Store is expected to generate gross profit of $1,000,000 in years 5-7
Assuming the company requires a 9% annual return and uses a time horizon of 7 years, what is the net present value?
Thank you!!
I suck at math >.< Accounting is not my strong suit.
1 Answer
- 6 years agoFavorite Answer
If the total salaries for the sales people is $40,000 per year and not $40,000 each the NPV is $677,584.64 meaning the project is acceptable.
In Excel the sheet should look like this:
A B C
1 Year 0 $2,500,000 9%
2 Year 1 $ 430,000
3 Year 2 $ 430,000
4 Year 3 $ 630,000
5 Year 4 $ 630,000
6 Year 5 $ 830,000
7 Year 6 $ 830,000
8 Year 7 $ 830.000
9 =NPV(C1,B2:B80)+B1
If the salaries are for each = $120,000 per year then the cash flows would be changed to the following:
Year 1 $350,000
Year 2 $350,000
Year 3 $550,000
Year 4 $550,000
Year 5 $750,000
Year 6 $750,000
Year 7 $750,000
With the same formula, and would result in a NPV of 274,948.41, which is also acceptable for this project.
