Question #5: Fontenot Seafood Company is thinking about building a new pier whic
ID: 2335854 • Letter: Q
Question
Question #5: Fontenot Seafood Company is thinking about building a new pier which will cost $280,000. Fontenot expects to get 5 years of use out of the pier, after which it will be sold for $150,000. Fontenot estimates that there will be annual cash flows of $55,000 resulting from the new pier. Fontenot’s borrowing rate is 8% and it cost of capital is 10%.
Required: Prepare an analysis to calculate the net present value of the pier and discuss whether this pier is a good investment for the Company.
Explanation / Answer
Net present value = Present value of cash inflow-Present value of cash outflow
= (55000*3.79078+150000*0.62092)-280000
Net present value = 21630.90 or 21631
Yes, this pier is a goods investment for the company.