Question

Whirled Peas, a trendy children’s clothing retailer, is considering the purchase of an embroidery machine to...

Whirled Peas, a trendy children’s clothing retailer, is considering the purchase of an embroidery machine to allow them to offer monogramming services. The machine would require a $34,000 investment and have a useful life of 5 years and is projected to have a salvage value of $9,000. Cash inflows are expected to be:

year 1-4000

year 2-9000

year 3-12000

year 4-23000

year 5-18000

The required rate of return is 14%. Calculate the present value of the cash inflows.

  • A :

    $66,000

  • B :

    $56,760

  • C :

    $41,502

  • D :

    $45,317

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Answer #1

Answer:

Correct Option is c: $41502

Explanation:

Computation of Present Value of Cash inflow:

Present value = Annual inflow x Present Value Interest Factor(r,n)

Year 1 = $4000 x Present value interest factor (14%,1) = $4000 x 0.8772 = $3508.8

Year 2 = $9000 x Present value interest factor (14%,2) = $9000 x 0.7695 = $6925.5

Year 3 = $12000 x Present value interest factor (14%,3) = $12000 x 0.6750= $8100

Year 4 = $23000 x Present value interest factor (14%,4) = $23000 x 0.5921= $13618.3

Year 5 = $18000 x Present value interest factor (14%,5) = $18000 x 0.5194= $9349.2

Total Present Value = $3508.8 + $6925.5 + $8100 + $13618.3 + $9349.2 = $41501.8 i.e. $41502

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