Jackson Music is considering investing $800,000 in private lesson studios that will have no residual value. The studios are expected to result in annual net cash inflows of $100,000 per year for the next nine years. Assuming that Jackson Music uses a 10% hurdle rate, what is the net present value (NPV) of the studio investment? Is this a favorable investment?
The net present value of the studio investment is $_______________.
Since the NPV is (positive or negative), the studio investment (does provide, does not provide) Jackson Music’s minimum required rate of return. Therefore, the investment is (Favorable, not favorable).
Please answer each part of the question, and please for the fill-in-the-blank sentence above, choose one of the options in each parentheses. Thank you!
Answer : The net present value of the studio investment is $__(224,100) Negative_____________.
Working Notes for the above answer is as under
We have been provided with the information that,
Jackson Music is considering investing $800,000
So Po =$ 800,000
The studios are expected to result in annual net cash inflows of $100,000 per year for the next nine years.
Cash flow= $ 100,000
n= 9
Jackson Music uses a 10% hurdle rate
So i=10%
Now with all these figure we will calculate Present Value
Present Value = Cash flow x PVIFA(10% , 9 years)
=$ 100,000 x PVIFA(10% , 9 years)
=$ 100,000 x 5.759
=575900
Now we will find NPV
NPV = PV of cash inflow- Initial outflow
=575900-800000
=(224,100)
Conclusion:
Since NPV is negative so studio investment (does provide, does not provide) Jackson Music’s minimum required rate of return.
