Brett Collins is reviewing his company’s investment in a cement plant. The company paid $15,000,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether the plant has met original expectations before he decides its fate. The company’s discount rate for present value computations is 8 percent. Expected and actual cash flows follow: (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |||||||||||
Expected | $ | 3,400,000 | $ | 4,980,000 | $ | 4,600,000 | $ | 5,160,000 | $ | 4,260,000 | |||||
Actual | 2,640,000 | 3,030,000 | 4,870,000 | 3,870,000 | 3,540,000 |
Calculation of expected present value
Year | Expected cash Flow | PVF @8% | Present value |
0 | (15000000) | 1 | (15000000) |
1 | 3400000 | 0.926 | 3148400 |
2 | 4980000 | 0.857 | 4267860 |
3 | 4600000 | 0.794 | 3652400 |
4 | 5160000 | 0.735 | 3792600 |
5 | 4260000 | 0.681 | 2901060 |
NPV | 2762320 |
Calculation of Actual present value
Year | Actual Cash Flow | PVF @8% | Present Value |
0 | (15000000) | 1 | (15000000) |
1 | 2640000 | 0.926 | 2444640 |
2 | 3030000 | 0.857 | 2596710 |
3 | 4870000 | 0.794 | 3866780 |
4 | 3870000 | 0.735 | 2844450 |
5 | 3540000 | 0.681 | 2410740 |
NPV | (836680) |
No plant does not have met the original expectations since Actual NPV is (836680) whereas expected NpV is 276230. Higher the NPV better is the project. Whereas in this case actual NPV is negative.
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