Question

g Peng Company is considering an investment expected to generate an average net income after taxes of $2,700 for three years. The investment costs $55,500 and has an estimated $11,400 salvage value. Assume Peng requires a 10% return on its investments. Compute the net present value of this investment. (FV of $1, PV of $1, FV of $1 an PVA of $1) (Use appropriate factor(s) from the tables provided.) (Negative amounts should be indicated by a minus sign.)

Answer 1

Net Present value = -$40,221

Step-by-step explanation:

The net present value is the sum of the discounted cash-flows over the life of the project from t=0 to t=n.

Year Cash-flow PVIF Present Value

0 (55,500) 1.0000 (55,500)

1 2,700 0.9091 2,455

2 2,700 0.8264 2,231

3 2,700 0.7513 2,029

3 11,400 0.7513 8,565

Net Present value (40,221)

The salvage value is treated as a cash-flow at the end of year 3 as that's the last year in which the project records a cash inflow. In this question, a negative net present value implies that the project is not profitable, and should therefore not be undertaken.