BEC Question- NPV Calculation (Confused?)

  • Creator
    Topic
  • #202507
    Anonymous
    Inactive

    So I think I understand NPV calculations- but I have no idea how they’re calculating $10,000 per year for the 2-year annuity. Can someone help? Thank you so much!

    Pole Co. is investing in a machine with a 3-year life. The machine is expected to reduce annual cash operating costs by $30,000 in each of the first 2 years and by $20,000 in year 3. Present values of an annuity of $1 at 14% are

    Period 1 0.88

    2 1.65

    3 2.32

    Using a 14% cost of capital, what is the present value of these future savings?

    A. $60,800

    B. $62,900

    C. $59,600

    D. $69,500

    Answer (B) is correct.

    The cost reductions constitute two annuities: a 3-year annuity of $20,000 per year and a 2-year annuity of $10,000 per year. Using a 14% cost of capital and ignoring tax effects, the present value of the future savings can be calculated as follows:

    PV of 3-year cash savings: $20,000 × 2.32 = $46,400

    PV of 2-year cash savings: $10,000 × 1.65 = 16,500

    Net present value $62,900

Viewing 4 replies - 1 through 4 (of 4 total)
  • Author
    Replies
  • #780013
    Vanessachy
    Participant

    It makes sense.
    first year is 30000
    second year is 30000
    third year is 20000
    So if I want to use 2.32, I have to subtract 10000 from year 1 and year 2. so
    year 1 30000-10000
    year 2 30000-10000
    year 3 20000
    20000*2.32 and then use 10000*1.65

    Far, 64 82
    Reg, 60 86
    Aud, 74 82
    Bec, 70 81
    Done done done! I did it!!!
    Licensed CPA in MA, issued October 2016

    Far 10/26/2015, 64, 1/4/2016, 82
    Reg 7/10/2015, 60, 2/27/2016, 86
    Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
    Bec, 6/10/2016, 70,9/8 retake

    #780014
    Anonymous
    Inactive

    Guys can you tell me how you get 2.32 and 1.65 in the problem

    #780015
    Anonymous
    Inactive

    MITHUN K. SHAHA,

    Whatever book that was from, their answer sucks imo. What's happening is that only the PV of an annuity was provided, but the $20,000 in year 3 is not for 3 years. Therefore, you must subtract PV of an annuity for 3 years from the PV of an annuity for 2 years. i.e. (20,000 x 2.32) – (20,000 x 1.65) = 13,400. Now add PV of 30,000 for 2 years: 30,000 x 1.65 = 49500. 13,400 + 49,500 = 62,900.

    #780016
    jlp0369
    Participant

    I had the same issue with this question. I decided it was easier to just calculate it using the formula PV = FV / (1+r)to the nth . This can be found on page B3-20 if using Becker

    FAR: 87
    REG: 90
    BEC: 74(ouch), retake 7/16/16
    AUD: 96

Viewing 4 replies - 1 through 4 (of 4 total)
  • You must be logged in to reply to this topic.