Question

4. If the cost of capital is 8%, will a company that that would pay $100,000 investment in equipment in year 0, and then receives $21,000 per year each of the next eight years (but no salvage value) make the investment?

multiple choice 4

• No

• Yes

5. What would the net cash flows (not discounted) for a company that makes a $100,000 investment in year 0, and then receives $21,000 per year each of the next eight years?

multiple choice 5

• $268,000

• $168,000

• $68,000

• $100,000

Answer 1

1 Yes because the project provide positive return

Cash flow. Present valu factorat8%. Presentvalu

21000. 0.926. 19446

21000. 0.857 . 17997

21000. 0.794,. 16674

21000. 0.735. 15435

21000. 0.681. 14301

21000. 0.630 . 13230

21000. 0.583. 12243

21000 . 0.540. 11340

Total. 120666

Net cash flow=original investment-present value of cash out flows

$100,000-$120,666=20,666

So we can accept project

2. Under second question we can't, discount cash inflows

So cash inflows=21000$*8=168000

Out flow=100,0000

=Net cash flow=68000