Question

A factory costs $555,925. You forecast that it will produce cash inflows of $269,402 in year 1, $135,000 in year 2, and $270,000 in year 3. The discount rate is 6.00%.

a.	Calculate the PV of cash inflows. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Present value

$

b.	Should the company invest in the factor?

Answer 1

The question is solved by calculating the net present value.

a.Net present value is solved here using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$555,925. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 9%.
• Press the down arrow and CPT buttons to get the net present value.

The present value is $45,074.56.

b.Yes, the company should invest in the factor since it generates a positive net present value.

In case of any query, kindly comment on the solution.