[Anonymous]

Salem Co. is considering a project that yields annual net cash inflows of $420,000 for years 1 through 5, and a net cash inflow of $100,000 in year 6. The project will require an initial investment of $1,800,000. Salem’s cost of capital is 10%. Present value information is presented below:

Present value of $1 for 5 years at 10% is .62.

Present value of $1 for 6 years at 10% is .56.

Present value of an annuity of $1 for 5 years at 10% is 3.79.

What was Salem’s expected net present value for this project?

a.

($108,200)

b.

($152,200)

c.

($442,000)

d.

$83,000

Explanation

Choice “b” is correct. Net present value is computed as the difference between project inflows and outflows, discounted to present value as follows:

Inflows:

Years 1 through 5: $420,000 x 3.79 =

$ 1,591,800

Year 6: $100,000 x .56 =

$ 56,000

Present value of all inflows

$ 1,647,800

Outflow (today, discount factor of 1.0)

$ 1,800,000

Net Present Value

$ 152,200

[mckan514w]

MITHUN- because you are receiving 420,000 for each year 1-5 so it is an annuity due and then in year 6 you get a “lump sum” of 100,000 which would just use the PV factor. Remember that basically annuity is a series of payments received….

And they ask me why I drink

BEC 71, 82
AUD 75
REG 75
FAR 61, 69, 83

and they ask me why I drink...

FAR- 61-next time I'll ask for lube instead of a calculator
REG-75- Never been so happy to see such a low grade
BEC- 8/11
AUD- 9/2

[Anonymous]

Hi mckan514w,

First of all thank you. Can you tell me what is lump sum ?

[Author]

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