Question

A corporation is considering purchasing a new plant asset.  The asset will cost $85,000.  The corporation requires an...

A corporation is considering purchasing a new plant asset.  The asset will cost $85,000.  The corporation requires an 8% return on similar investments.  The corporation plans to use the asset for 4 years and then sell it for the salvage value.  The estimated salvage value of the asset in 4 years is $15,000.  

The corporation estimates that if purchased the new asset will provide the following additional net cash flows (assume the cash flows occur at the end of the year):

Year 1             $30,000

Year 2               25,000

Year 3               22,000

Year 4               21,000

a) Calculate the present value of the future cash flows.

b) Calculate the net present value.

Business   Accounting   
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Answer #1
1) present value of the future cash flows.
Year Cash Flow PV Factor PV Of Cash Flow
a b c=1/1.08^a d=b*c
1 $    30,000 0.92593 $           27,777.78
2 $    25,000 0.85734 $           21,433.47
3 $    22,000 0.79383 $           17,464.31
4 $    36,000 0.73503 $           26,461.07
Present value $           93,136.63
2) Net Present value =Present value of future cash flow- initial cost
=$93136.63-85000
=$8136.63
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