Question

Required Information (The following information applies to the questions displayed below.) Metro Car Washes, Inc. is reviewing an Investment proposal. The initial cost as well as the estimate of the book value of the Investment at the end of each year, the net after-tax cash flows for each year, and the net income for each year are presented in the following schedule. The salvage value of the investment at the end of each year is equal to its book value. There would be no salvage value at the end of the investment's life. Year Annual Net After-Tax Cash Flows Annual Net Income Initial Cost and Book Value $ 330,000 220,000 132,000 66,000 22,000 $140,000 120,000 100,000 80,000 60,000 $30,000 32,000 34,000 36,000 38,000 Management uses a 14 percent after-tax target rate of return for new investment proposals. Use Arpendix A for your reference. (Use appropriate factor(s) from the tables provided.) Compute the proposal's net present value. et present value

Answer 1

Solution:

Computation of Net present value
Year	Cash Flows	PV factor @ 12%	Present value
0	-3,30,000	1	-3,30,000
1	1,40,000	0.877	1,22,780
2	1,20,000	0.769	92,280
3	1,00,000	0.675	67,500
4	80,000	0.592	47,360
5	60,000	0.519	31,140
Net Present Value			31,060