A new IT server for a company will cost $422,457.00 today. The company expects the server will create an incremental cash flow to the firm of $132,309.00 per year. The company wants an 7.00% return for all capital budgeting projects. The company will run the server for the next 5 years.

What is the NPV of this project?

The **Net Present Value (NPV)** is calculated using the formula:

\[
NPV = \sum_{t=1}^{n} \frac{CF_t}{(1+r)^t} - C_0
\]

Where:
- $ CF_t $ is the cash flow in year $ t $,
- $ r $ is the required rate of return (7.00% or 0.07),
- $ n $ is the number of years (5 years),
- $ C_0 $ is the initial investment cost ($422,457.00).

Let’s break it down:

1. Cash flows per year: $132,309.00
2. Discount rate: 7% (or 0.07)
3. Number of years: 5
4. Initial investment: $422,457.00

We need to compute the present value of each year's cash flow and sum them, then subtract the initial cost.

\[
NPV = \left( \frac{132,309}{(1+0.07)^1} + \frac{132,309}{(1+0.07)^2} + \frac{132,309}{(1+0.07)^3} + \frac{132,309}{(1+0.07)^4} + \frac{132,309}{(1+0.07)^5} \right) - 422,457
\]

I will calculate this now.The **Net Present Value (NPV)** of this project is **$120,036.02**. Since the NPV is positive, it indicates that the project is expected to generate more value than the cost, making it a worthwhile investment.

Would you like more details or have any questions?

Here are 5 related questions to expand on this topic:
1. What does it mean if the NPV were negative?
2. How does a change in the discount rate affect the NPV?
3. Can NPV be used for comparing two projects? How?
4. What is the Internal Rate of Return (IRR), and how is it related to NPV?
5. How does depreciation affect cash flows and NPV?

**Tip:** NPV is sensitive to the discount rate, so it’s important to choose an appropriate rate that reflects the risk and opportunity cost of the project.

A new IT server for a company will cost $422,457.00 today. The company expects the server will create an incremental cash flow to the firm of $132,309.00 per year. The company wants a 7.00% return for all capital budgeting projects. The company will run the server for the next 5 years. What is the NPV of this project?

Learn how to calculate the Net Present Value (NPV) for a company's capital budgeting project. This example involves a $422,457.00 investment, annual cash flows of $132,309.00, and a required return of 7% over 5 years. Understand key concepts like NPV, discounted cash flow, and capital budgeting for college-level finance courses.

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