Question

Brett Collins is reviewing his company’s investment in a cement plant. The company paid $14,400,000 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 discount rate 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	$	3,330,000		$	4,960,000		$	4,630,000		$	5,030,000		$	4,240,000
Actual		2,640,000			3,020,000			4,870,000			3,870,000			3,520,000

Required

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

Here you go with the solution:

NPV of Expected Cash Flows: 31,94,046/- and NPV of Actual Cash Flows: -2,60,218/-

NPV of Expected Cash Flows
Year	Expected ($)	PVF	Present Value
0	-1,44,00,000	1	-1,44,00,000
1	33,30,000	0.92593	30,83,347
2	49,60,000	0.85734	42,52,406
3	46,30,000	0.79383	36,75,433
4	50,30,000	0.73503	36,97,201
5	42,40,000	0.68058	28,85,659
Net Present Value			31,94,046
NPV of Actual Cash Flows
Year	Expected ($)	PVF	Present Value
0	-1,44,00,000	1	-1,44,00,000
1	26,40,000	0.92593	24,44,455
2	30,20,000	0.85734	25,89,167
3	48,70,000	0.79383	38,65,952
4	38,70,000	0.73503	28,44,566
5	35,20,000	0.68058	23,95,642
Net Present Value			-2,60,218