Question

Brett Collins is reviewing his company’s investment in a cement plant. The company paid $12,000,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether the plant has met original expectations before he decides its fate. The company’s desired rate of return for present value computations is 8 percent. Expected and actual cash flows follow: (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

	Year 1			Year 2			Year 3			Year 4			Year 5
Expected	$	2,640,000		$	3,936,000		$	3,648,000		$	3,984,000		$	3,360,000
Actual		2,160,000			2,448,000			3,936,000			3,120,000			2,880,000

Required

1. a.&b. Compute the net present value of the expected and actual cash flows as of the beginning of the investment. (Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar.)

Answer 1

rate positively ..

		i	ii	iii	iv=i*iii	v=ii*iii
					Present value
	year	Expected	Actual	PVIF @ 8%	Expected	Actual
	0	(12,000,000)	(12,000,000)	1.0000	-12000000	-12000000
	1	2,640,000	2,160,000	0.9259	2444444	2000000
	2	3,936,000	2,448,000	0.8573	3374486	2098765
	3	3,648,000	3,936,000	0.7938	2895900	3124524
	4	3,984,000	3,120,000	0.7350	2928359	2293293
	5	3,360,000	2,880,000	0.6806	2286760	1960080
					1929949	-523338
	Expected NPV =		1,929,949
	Actual NPV=		(523,338)