Question

CHOOSE THE CORRECT ANSWER:

1) PVC Corporation is considering an investment proposal in which a technology investment of $10,000 would be required. The investment would provide cash inflows of $2,000 per year for six years. The technology investment will have no salvage value at the end of six years. If the company's discount rate is 10%, the investment's net present value is closest to (Ignore income taxes.): (See the time value of money BELOW THE PAGE.)

A. $1,289

B. $(1,289)

C. $3,066

D. $2,000

2) RST Corporation has provided the following data concerning an investment project that it is considering:

Initial investment                                                                                   $160,000

Annual cash flow                                                                                   $54,000 per year

Salvage value at the end of the project                                                   $11,000

Expected life of the project years                                                            4 years

Discount rate                                                                                         10%

The net present value of the project is closest to: (See the time value of money BELOW THE PAGE)

A. $175

B. ($23,694)

C. $3,662

D. $11,175

3) An increase in the expected salvage value at the end of a capital budgeting project will

A. Increase the cash outflows of the project.

B. Increase the present value of cash inflows of the project

C. Decrease the cash inflows of the project

D. Decrease the net present value of a project

HERE IS THE Time Value of Money Factor for the Present Value of a Sum
PV =FV * TVM Factor					Present Value of a Sum = FV * 1/ (1 + i) n
	2%	3%	4%	5%	6%	8%	10%	12%
1	0.9804	0.9709	0.9615	0.9524	0.9434	0.9259	0.9091	0.8929
2	0.9612	0.9426	0.9246	0.9070	0.8900	0.8573	0.8264	0.7972
3	0.9423	0.9151	0.8890	0.8638	0.8396	0.7938	0.7513	0.7118
4	0.9238	0.8885	0.8548	0.8227	0.7921	0.7350	0.6830	0.6355
5	0.9057	0.8626	0.8219	0.7835	0.7473	0.6806	0.6209	0.5674
6	0.8880	0.8375	0.7903	0.7462	0.7050	0.6302	0.5645	0.5066
7	0.8706	0.8131	0.7599	0.7107	0.6651	0.5835	0.5132	0.4523
8	0.8535	0.7894	0.7307	0.6768	0.6274	0.5403	0.4665	0.4039
9	0.8368	0.7664	0.7026	0.6446	0.5919	0.5002	0.4241	0.3606
10	0.8203	0.7441	0.6756	0.6139	0.5584	0.4632	0.3855	0.3220
20	0.6730	0.5537	0.4564	0.3769	0.3118	0.2145	0.1486	0.1037
25	0.6095	0.4776	0.3751	0.2953	0.2330	0.1460	0.0923	0.0588
Time Value of Money Factor for the Present Value of an Annuity
PV = Annuity * TVM Factor						Present Value of an Annuity = X*((1-(1/(1+i)^n))/i)
	2%	3%	4%	5%	6%	8%	10%	12%
1	0.9804	0.9709	0.9615	0.9524	0.9434	0.9259	0.9091	0.8929
2	1.9416	1.9135	1.8861	1.8594	1.8334	1.7833	1.7355	1.6901
3	2.8839	2.8286	2.7751	2.7232	2.6730	2.5771	2.4869	2.4018
4	3.8077	3.7171	3.6299	3.5460	3.4651	3.3121	3.1699	3.0373
5	4.7135	4.5797	4.4518	4.3295	4.2124	3.9927	3.7908	3.6048
6	5.6014	5.4172	5.2421	5.0757	4.9173	4.6229	4.3553	4.1114
7	6.4720	6.2303	6.0021	5.7864	5.5824	5.2064	4.8684	4.5638
8	7.3255	7.0197	6.7327	6.4632	6.2098	5.7466	5.3349	4.9676
9	8.1622	7.7861	7.4353	7.1078	6.8017	6.2469	5.7590	5.3282
10	8.9826	8.5302	8.1109	7.7217	7.3601	6.7101	6.1446	5.6502
20	16.3514	14.8775	13.5903	12.4622	11.4699	9.8181	8.5136	7.4694
25	19.5235	17.4131	15.6221	14.0939	12.7834	10.6748	9.0770	7.8431

Answer 1

question1:

B.($1,289).

working:

year	cash flow	discounting factor	discounted cash flow
0	(10,000) (outflow)	1	(10,000)
1	$2000 (inflow)	4.3553 (from Present value of annuity table 10%, 6 years)	8,710.60
		Net present value (negative)	($1,289)

question 2:

D.$11,175.

note:

cash flow from salvage value is ignored in the below solution.

year	cash flow	discouting factor	discounted cash flow
0	$160,000 (outflow)	1	(160,000)
1	54,000 (inflow)	3.1699 (Present value of annuity for 4 years @10%)	171,174.60
		net present value	11,174.60

question 3:

B.Increase the present value of cash inflows of the project.

An increase in the expected salvage value at the end of a capital budgeting project will increase the present value of cash inflows of the project.

(since salvage value is a cash inflow)