Question

Initial Investment: 450000 (given) *1.000 = -450000 (calculation I know how to do)

Working Capital Initial: 16000 (given) *1.000 = -16000 (calculation I know how to do)

Working Capital Return: 16000 (given) *0.751(#from discount rate chart) = 12016 (calculation I know how to do)

*Annual Cash Flow: 133000 (given) per year *2.487(DONT KNOW WHERE THIS # IS COMING FROM) = 330771 (need help with this one line)

Salvage Value at the end of the project: 6000 (given) *0.751(# from chart) = 4506 (calcuation I know how to do)

Expected life of the project: 3 years (given)

Discount Rate: 10% (given)

The problem has you find present value. However I am stuck on a number that is given in the problem and on a test or homework problem I would not know how to find it. If someone can clarify where the 2.487 comes from in the annual cash flow line it would answer my question. Thanks.

Answer 1

Your requirement is how 2.487 came in the Annual Cashflow part.

So, the expected life of project is 3 years

Discount rate given is 10%

We know that to find the present value of annual cash flows when cash flows each year is same we would use the formula

Annual Cash flows * Present Value of Annuity Factor ( r, n)

where r is the discount rate given i.e 10%

n is the life of project i.e 3 years

So present value of annual cash flows would be

133000 * Present Value of Annuity Factor ( 10% , 3)

The present value of annuity factor @10% for 3 years would be the sum of discounting factors taken @10% at year 1 , year 2 and year 3.

= 0.9091 + 0.8264 + 0.7513

= 2.4868 or 2.487

Therefore,Present value of annual cash flows

133000 * 2.487

= 330771