Question

Required Information The following information applies to the questions displayed below. Peng Company is considering an investment expected to generate an average net income after taxes of $1,950 for three years. The investment costs $45,000 and has an estimated $6.000 salvage value. Assume Peng requires a 15% return on its investments. Compute the net present value of this investment. Assume the company uses straight-line depreciation. (PV of $1, FV of $1, PVA of S1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Negative amounts should be Indicated by a minus sign. Round your present value factor to 4 decimals.) eBook Select Chart Amount * PV Factor Present Value Hint Cash Flow Annual cash flow Residual value Print Net present value References < Prev 22 of 27 Nextm? Type here to search

Answer 1

Calculation of Depreciation = (Cost of Project-Salvage Value)/ Useful Life of project

= $(45000-6000)/3

=$13000/year

Cahflow of After Tax = Profit after tax + Depreciation

= $1950+$13000

= $14950/-

Avg Investment = {1/2(Cost of Project-Salvage Value)+salvage Value}

= {1/2(45000-6000)+6000}

= $25500/-

Avg return after tax= $1950/$25500*100

7.6471%

Year PVF @ 15% Amount NPV

(a) (b) (c) (b*c)

1-3 2.283 $14950 $34130.85

3 0.658 $6000 $3948

A) Total Present Value of cashflow $38,078.85/-

B) Cost of Investment $45,000/-

NPV (B-A) $6921.15/-